In a bid to motivate price reductions among locally assembled vehicle, increase automobile market size and promote electric vehicles, the government is slashing duties and taxes for vehicles across the board. And while the overall policy could accrue some of these benefits, the government may be trying too hard to make everyone happy. The road to hell is paved with good intentions!
For the longest time, automobile assemblers in Pakistan have contended that locally assembled vehicles are expensive because of the high tax incidence on them—including sales tax and custom duties on import of parts and CKD kits. The policy—which will be part of the Finance Bill—is slashing FED, sales tax, regulatory duties and additional custom duties for all and sundry.
For locally assembled vehicles, in 2019, the government had introduced slabs for FED imposition where up to 1000cc cars were taxed at 2.5 percent, 1000 to 2000cc were taxed at 5 percent and cars above that engine size were taxed at 7.5 percent. After removing FED on cars up to 1000cc recently, the government is mulling on reducing FED on the remainder engines as well—down to 2.5 percent (for 1001cc-2000cc) and 5 percent (for above 2000cc).
This is together with the sales tax reduction from 17 percent to 12.5 percent for cars up to 1000cc. The expected price reduction (contingent on whether automakers will actually reduce prices) is between Rs72,000 to Rs150,000 for different models. For consumers that are acquiring an auto loan, the monthly burden may reduce between Rs1500 to Rs3200 (considering 6Mkibor+4% and 20% down payment). While this move may make these cars fairly more affordable for middle-income buyers, a rapid increase in demand without an adequate increase in production may lead to dealers selling on premium which would ultimately defeat the purpose of the fiscal incentives.
There are also incentives on the import of parts for electric vehicles and hybrid as well as plug-in electric vehicles in terms of custom duties and sales tax. This is incentivizing domestic manufacturing for both kinds of vehicles at the same time. But on top of that, this is supplemented by a reduction on regulatory duties for CBU imports—to 15 percent for engine size 1800cc and above and waived for engines lower than that. This is confusing policy direction. Yes, consumers are wary of EVs because of charge and range anxieties (read: “EV anxieties”, June 16, 2021), and in fact, without a robust charging infrastructure in place, the EV space may remain inadvertently small. But incentivizing hybrids and not just in their parts but in fully built units—and making them more affordable—will never make an electric future possible, as they are the safe bet. This makes the leap of faith on EVs more difficult (read more: “Hybrid thoughts”, Mar 11, 2021).
The government may be trying to make too many happy at the same time and in many instances, for no reason. The new policy is also incentivizing imports of CBU by slashing additional customs duty for cars with combustion engines below 1000cc down to zero and down to 2 percent for engines 1001cc and above. Regulatory duties on imported CBUs will also be reduced down to zero for cars above 1800cc and to 30 percent for engines above. This is absurd. The government will reduce its own revenue while also promoting import of vehicles which have no bearing on the domestic automotive industry or a new assembler attempting to test the market and in fact, will only increase the influx of imported cars in the economy; the impact of taxation on the rich reduced further down.
On the positive side, in order to make localization happen, the government will closely monitor the developments happening within the industry and each part that is localized by an automaker will incur an increased import duty of 15 percent. Unless all automakers collude to not localize a specific part to keep duties intact, they will all have a stick to deal with. Essentially, race to localize and remain ahead of their peers or face a higher import duty.
While well-intentioned, this is a confusing policy because the policymakers are trying to do too much at the same time. On the one hand, the government wants to increase green technology and electrification of vehicles by promoting EVs, but on the other hand the government is also promoting hybrids and plugs-in while massively incentivizing not only locally assembled combustion engine cars but also imported ones. If the policy wants to promote cars for middle-income households—and a case could be made here for that in the absence of mass transit and expensive commute—the incentives should only reflect that. But instead, the benefits are for everyone, even elite SUV and sedan importers which serve no purpose and are actually counterproductive. Policymakers need to regroup and create a goal-oriented plan that does not contradict itself.