FORDISM IN PAKISTAN

Groping in the Dark for Ideas to Enhance Revenue Collections

Mazhar Mohsin Chinoy sees only more trouble ahead for the automotive industry.

Mazhar Mohsin Chinoy

Updated 2 days ago

DAWN

For the last few years, June has been a tense month for the automotive industry in Pakistan, as it anticipates, or rather dreads, another budget bringing darker shades of grey than the year gone by. For most of the year, the industry was reeling from the upsets of Budget 2023-24, only picking up some action in the last quarter. An advance income tax of between six and 10% (depending on engine size) was imposed, jacking up car prices. A 35% customs duty was rung up on the import of car parts and, unexpectedly, no new duty exemptions were given on hybrid electric vehicles to incentivise their use.

The detriments of that budget package were telling. Although sales numbers rallied for some manufacturers in the last quarter of the year, annual car sales in 2023-24 fell 18% over the previous year, with 103,826 units sold versus 126,878 sold in 2022-23. Production numbers also took a major hit, with 79,573 units manufactured in 2023-24 compared to 101,984 units last year, a significant decline of 22%.

Fast forward one year, the economy remains sullied, if not worse-off and industry expectations have mirrored that sentiment. The pre-budget grapevine was ripe with news of an enhanced levy on petroleum, GST on petroleum products, duty increases on imported used-cars, and other regulatory duties on critical car parts. Mostly IMF speak. Not good tidings at all. The government’s financial algorithm for the year was spelled out on June 12, 2024, which, not surprisingly, brought a barrage of increased duties and enhanced tax calculators for passenger cars.

Increased Petroleum Levy

The government normally leverages the energy sector – power, gas and petroleum – to generate maximum revenue. The levy on petroleum, which was previously 60%, increased to a staggering 80%, with a big rise in fuel prices on the cards. This has been an anti-climax to the recent sustained decline in petrol prices after going off the charts for nearly the entire last fiscal year. As per a report by Arif Habib Limited, the highest ever fuel prices experienced during 2023-24 led to the biggest decline in 18 years for petrol and diesel sales, decreasing by eight percent over the previous year to 15.28 million tons sold. If this trend continues, and it is likely that it will, accountants will need to dig into their calculators to assess the degree to which the projected revenue generation target of Rs 1,281 billion can be achieved. The new levy will likely bring even more misery to the lower and middle class sections of society and challenge the government’s efforts to control wild-eyed inflation. Again, one can only look to the heavens and pray that international crude oil prices remain subdued through the year to somewhat offset this steep imposition.

New WHT Regime

The budget proposed an enhanced withholding tax (WHT) regime for new cars, essentially to take advantage of burgeoning car prices and propose a new way of calculating the tax. Doing away with the old system of imposing WHT on the basis of engine size, WHT is now to be calculated based on the invoice/ex-factory price of the vehicle. The tax would range between 0.5 and five percent for vehicles in the 800cc to 2000cc category. While this move will not have a significant impact on relatively lesser-priced cars, such as Suzuki variants like Alto and Cultus, the estimated extra damage to pocket for higher- priced vehicles, (for invoice prices of car variants between 1000cc to 2000cc), will range between Rs 30,000 to Rs 330,000 at current prices, driving up the upfront investment required to purchase a new car.

Trouble for HEV Imports

In 2013, the government announced a 50% customs duty exemption to encourage buyers towards hybrid electric vehicles (HEVs). After 11 years and in an apparent backtracking of the National Electric Vehicle Policy, the budget proposed the withdrawal of this 50% subsidy on regulatory customs duty on the import of HEVs, increasing prices substantially. At current prices, this would have an impact of up to three million rupees for selected imports. For the yea-sayers, this move will be seen to incentivise local production of such vehicles, making them more competitive in price and hence encouraging local assembly.

Car Financing Slide Continues

In June 2022, car financing, as per the State Bank of Pakistan’s data, stood at a healthy Rs 368 billion – but has since declined every month to reach Rs 233 billion as of May 2024, a drop of 21% and Rs 135 billion. This has been a natural function of the increased rates for financing and skyrocketing car prices and will likely remain stagnant, if not slip further, given that interest rates are not projected to decline too quickly in the coming months. Plus, the new tax regime will enhance end-user car prices, effectively closing that avenue to trigger sales via car financing.

Punjab Increases Car Registration 

FeesThe most populous province of the country also decided to elbow in on its own increased revenue generation, hopefully to fund development projects across Punjab. Effective July 1, 2024, registration fees for new cars have been increased from between one and four percent (<1000cc to >4000cc), making new cars more expensive if registered in Punjab. There is bad news for sales of used-cars too. If a new car is sold to another buyer within the first 10 years of purchase, a 10% annual transfer fee will now be imposed in addition to already prevalent transfer costs.

Silver Lining?

The budget also made some modifications to tax cuts specific to imported used-cars, implementing a 16% regulatory duty on such cars in the 1300cc to 1800cc category, but scrapping any duties in the below-1300cc category. This has meant that such cars can now be imported at very competitive prices, troubling the already battered sales of locally produced variants in the below-1300cc category. This may spell doom for the local industry (specifically Pak Suzuki which makes cars in that category), but it does provide greater breadth of selection to consumers in terms of more modern variants at better prices. The euphoria may be short-lived though. The influential Pakistan Automobile Manufacturers Association has written to the government to formally protest the move and demand the imposition of 15% regulatory duty on imports of used-vehicles in the below-1300cc category.

Tailpiece

Overall, while luxury cars were made more expensive and hence discouraged, no incentives were proposed for smaller cars to benefit the middle class, nor for under-utilised local production facilities for trucks and buses that can save increasingly precious and elusive foreign exchange that is wasted on imports of heavy vehicles. The crushing tax regime proposed in the budget has lent weight to the industry perception that the government continues to grope in the dark for innovative ideas to enhance revenue collections. The nucleus of the ‘solution’ is apparently the continued burdening of the lower and middle classes already coming to terms with a deteriorating way of life and a high-altitude inflation rate that has remained upwards of 22% for the last two years. Budget proposals over other sectors will impose even more rigid austerity on the common Pakistani, in an economy that continues to be demarcated by financial stagnancy and endemic political dysfunction. The automotive industry, resilient as it is, may well continue to take a back seat to progress in the new fiscal term.


Mazhar M. Chinoy has served as a director at LUMS.
mmchinoy@gmail.com