BAN ON IMPORT OF USED CARS LIKELY IN THE BUDGET 2008-9

LOCAL AUTO INDUSTRY QUITE CAPABLE TO CATER TO MARKET DEMAND

AMANULLAH BASHAR
May 19 - 25, 2008

The government is actively considering to put a ban on import of used cars in the budget 2008-08 to save the local automobile industry.

Informed sources told Pakistan & Gulf Economist that the step is being taken on the back of drastic cut in sales volumes of the local auto manufacturers who have invested billions of rupees for the capacity expansion. Currently, the auto assemblers in Pakistan facing a surplus situation with the gradual decline in sales volume due to various factors especially the higher financial cost and unchecked imports of used cars.

Actually, the auto sales were on the downhill journey for quite sometimes, with volumes declining 6.2% YoY to 17,259 units in April 2008. In fact 12% higher Coure sales helped INDUS MOTORS in posting growth of 6.9% YoY however Pakistan Suzuki Motor Company's (PSMC's) sales were down 5.7% YoY to 10,891 units in April 2008.

HIGHER FINANCING

For quite sometimes the auto sales have shown significant slow down amid rising financing cost, tougher financing terms by banks and higher prices. The pressure continued to mount due to vehicle operating costs owing to rising fuel prices. It may be mentioned that the major consumption of the motor gasoline (petrol) has been restricted to motor cycles alone as the four wheelers have shifted either on CNG or on diesel which is also slipping out of hands of the consumer due to unabated price increase.

Meanwhile the auto industry has moved with some concrete proposals to the government with a request to incorporate in the forthcoming budget enabling this otherwise vibrant sector to keep up the pace of growth and cater to the needs of the local market:

WITHDRAWAL OF 2.5 WITHHOLDING TAX AND 1% FEDERAL EXCISE DUTY

By the end of year 2006, the Government had a great deal of engagement with the industry as result of which a policy package AIDP (Auto Industry Development Prgoram) was approved, which, interalia, included a pre-announced tariff for a period of five years. However, an entirely new levy which figured nowhere in the AIDP in the shape of 2.5% Withholding Tax alongwith 1% Federal Excise duty were imposed.

Withdrawal of 2.5% Withholding Tax and 1% Federal Excise duty on purchase of locally produced vehicles, as this is a deviation from the agreed position under the AIDP and consistency in the policies be ensure.

RESTRICTION OF IMPORT OF USED CARS

The Auto industry, during he last 05 years, has been consistently increasing the capacity and the current capacity higher than demand and as such there is no need of used cars import. Accordingly, it is recommended that Import of Used Vehicles should be further restricted by

application of non-tariff barriers as in India and Thailand

reduction on depreciation from 2% per month to 1% p.m subject to a maximum of 25%.

registration of vehicles in name of returning Pakistani for atleast 1 year

reduce used vehicle life from 3 years to 2 years

Complete abolition of Gift Scheme

FTAS / RTAS

Proper mechanism for mandatory consulting the industry before finalization of FTAs / RTAs be implemented.

SPARE PARTS FOR AFTER-SALES MARKET AND DOCUMENTATION

After-Sales Market - In addition to manufacturing / assembly of vehicle, we also trade in spare parts for after-sales services. These parts are also imported by spare parts dealers, which are grossly under-invoiced and mis-declared, which adversely affect our business volume and market share of spare parts business. Consequent to this, Government revenues are also affected.

RECOMMENDATIONS

Sales Tax at Retail Stage steps be taken in consultation with the industry by the Government to control this. We would also suggest to impose Sales Tax at Retail stage on spare parts for automotive vehicles across the board.

Documentation - All claims paid by the Insurance Company in relation to Vehicle Repair should be allowed to the Insurance Company as an allowable expense only if the expense is supported by a Sales Tax Invoice for Spare Parts purchase. This will automatically channel the Vehicle Repairs and parts purchases through a Registered Workshop / Spare Parts Retailer. This will bring about documentation to some extent in this area.

Used Auto-Parts / Scrap: Smuggling and import of used auto parts pose a major problem to local auto-industry. It is therefore proposed that both smuggling and import of used auto-parts as scrap or otherwise should be stopped.

CUSTOM DUTY ON ROYALTY PAYMENTS

The auto industry is carrying out progressive assembly / manufacturing of vehicles under Technical Assistance Agreements (TAAs). Under the TAAs, Royalty is paid on progressive localization. The Customs is asking the Auto industry to make payment of Custom duty on Royalty and Technical Fee paid under the Technical Assistance Agreements. Under the Custom's Law the Custom duty on Royalty is payable only, if the payment of royalty is related to goods being valued (imported goods) and is paid as a condition of sale of the goods being valued. Consequently, any demand by Custom Authorities for paying Custom duty on royalty paid / payable on localization is unjustified and we would therefore request for a clarification by CBR on this issue.

DEPRECIATION RATE ON VEHICLES UNDER THE INCOME TAX ORDINANCE

The Depreciation rate for Corporate sector on Vehicles under the Income Tax Ordinance is @15% on reducing balance method, which is very low. In order to encourage the local industry it is proposed that rate of depreciation be increased to 25% per annum and an initial depreciation @ 50% be allowed in the year of purchase of new car.

COMPONENTS CHARGEABLE TO LOWER RATE OF DUTY

The imported CKD for assembly/manufacture of automotive vehicles also contain components which are otherwise chargeable to Custom Duty under the first schedule to the Custom Act 1969, at lower than CKD rates. However, on import, they are charged at the rate of CKD, specified under SRO 656(I)/2006. It is therefore, proposed that such components which attract lower statutory rate than CKD, should allowed to be imported at lower rates, if imported as part of the kit. A proviso to SRO 656(I)/2006 may be added as follows:

"Provided that for the parts attracting lower rate of statutory duty, the manufacturers/assemblers shall be allowed to get those parts cleared at such lower statutory rate".

PROVISION OF CONTRACT MANUFACTURING IN SRO 655(I)/2006

The local automakers are restricted to self-use only when they import under SRO 655(I)/2006. This restriction is relaxed by allowing the local automakers to have contract manufacturing. The provision of contract manufacturing is present under clause (i) of SRO 656(I) 2006 and similar provisions existed under SRO 453I)/2004. It is therefore, proposed that provision of contract manufacturing may be restored to an OEM/vendor on the same lines as it previously existed under SRO 453(I)/2004.

FRANCHISE SERVICES--- WITHDRAWAL OF EXCISE DUTY

Finance Act 2006 has levied excise duty by the insertion of the entry II, namely; "Franchise Services" in the Table II of Schedule I of the Excise Act, 2005. The local auto-industry was also called upon to pay the said duty. A number of representations were made in this behalf that automakers can not be treated at par with franchise food chain operators etc. because the payment in their case is nature of Technical Assistance. The position under these agreements is provision of technical information / technical transfer, which is different from position of a Franchiser under a franchise agreement. This was explained to the government in a number of meetings but question of interpretation still needs to be resolved. PAMA understands that it would adversely affect technology transfer / localization in the country if the franchise services in question were taken to include technical collaboration/ joint venture agreements. We therefore, propose that technical agreements be kept outside the scope of said "Franchise Services" and the necessary amendment in the law be specified.

RE-EXPORT OF FAILED OR DEFECTIVE PARTS

Re-export of failed or defective parts during warranty period: Such parts during the warranty period are replaced cost free. On arrival taxes are charged, which are paid. However, the defective or failed part is required to be sent back to the principal for his examination. At this stage the export is not hassle-free because customs ask indemnity bond for remittance of foreign exchange in respect of part being exported whereas there is, in effect, no sale or purchase and as such no foreign exchange is involved. Under para 11 of export policy (SRO 775/06) a provision exists for Pakistani exporters to re-import exported goods for removing defects during warranty period. A similar provision may therefore be added to cater to the above situation that OEMs may re-export defective/failed part without involvement of foreign exchange.

AUTO INDUSTRY DEVELOPMENT PROGRAM (AIDP)

The recent years have witnessed phenomenal 50 percent compounded growth in the local auto-industry with solid indication of further growth. Keeping this trend in view the government has positively responded and has recently approved AIDP with the aim at doubling the contribution of auto industry to GDP and its turn over to Rs. 600 billion in the next five years and reaching to an export level of USD 350 million for components mostly to the international after market and to the OEMs. It is therefore proposed

the government pronouncement of auto-related tariff for the next five years in respect of Cars/Lcvs may be made part of Finance Act 2008 so that both government and industry pursue their respective commitments for the projected growth of auto-industry as envisaged under AIDP.

A clear cut Action Plan for implementation of various components of AIDP other than Tariff.

Long term consistent policies, which should be strictly implemented

Automobile Industry - Invoicing Under Wholesale & Retail Concept - Proposal For Revisions In Income Tax Laws

The vehicles are invoiced by OEMs (Cars manufacturers) in the name of end customer and dealer(s) are paid commission thereon. OEMs withhold tax @ 10% on the amount of commission paid to the dealers, which is treated as full and final discharge of tax liability of the dealership.

Proposal - In order to implement the wholesale and Retail mechanism of invoicing whereby vehicles will be invoiced by OEMs to the dealers and dealers would subsequently invoice to the end customers.

Difficulties in implementing Wholesale and Retail mechanism - As per current Income Tax, law if OEMs implement the Wholesale & Retail Concept, i.e. OEMs invoice to the dealers and the dealers in turn invoice to end customers, the payment by end customers, if he is required to withhold tax, shall require withholding tax @ 3.5% while making the payment to the dealers. This withholding tax is not adjustable against final tax liability of the dealer and hence would cause extra tax burden to the dealer. Further, this withholding tax @ 3.5% of value of the car is much higher to the earnings / margin of the dealers on the sales.

Recommendation to FBR in order to make Wholesale and Retail concept workable

Sale of vehicles by authorized dealers of local car manufacturers to customers (whether individual or corporate) should not require withholding of tax by customers at the time of payment.

Income tax to be paid by authorized dealer on his income should be the maximum of the tax they are paying at present or 0.10% of net turnover.

CARS / LCVS ASSEMBLIES TO BE LOCALIZED IN NEXT 2 TO 4 YEARS

In the AIDP, it was proposed that following Sub-assemblies to be localized in next 2 to 4 years.

 

Alternator, Starter Moor, Water Pump, Fuel Pump, Fuel Filter, Seat Recliner, Air Cleaner assembly.

whereby the rate of duty will be increased on these components as under:-

2007-08

2008-09

2009-10

2010-2011

2011-2012

35%

35%

50%

50%

50%

Power Steering, Engines, Transmissions. Whereby the rate of duty will be increased on these components as under:-

2007-08

2008-09

2009-10

2010-2011

2011-2012

35%

35%

35%

50%

50%

We would like to mention that these assemblies have negative value addition and assembly operation of these parts will not generate employment and consequently, localization of these sub-assemblies will be counter productive. It will lead to increasing the cost of production rather than savings.