Policies can be good or bad, and often not written in stone. They can be improved, amended and evolved. But at least, once on paper, they should hold some semblance of consistency and longevity. Not in Pakistan. The notorious Statutory Regulatory Orders (SRO) culture that has been deeply entrenched in this country’s economic management is symptomatic of this lack of policy consistency. At times, doling out tax incentives or exemptions and other times, imposing regulatory duties at will in pursuit of short-term goals; without caring much for the consequences. Even as the Engineering Development Board (EDB) was mulling over the new auto development policy (read: “Inside the car policy maze”, Dec 29, 2021), the FBR was finalizing the mini-budget to rescind the very incentives being offered under the policy.
The new measures include an increase in Federal Excise Duty (FED), advance tax, transfer tax and sales tax on vehicles under 800cc. Recall that only a few months ago, the government had cut down on FED and sales tax for a nearly all vehicles that had brought prices down. At that time, cheaper bank borrowing and reduced prices became very favorable for car buyers. But only a few months later, car makers raised their prices to make up for their increasing costs (due to high commodity prices, freight and rupee depreciation). This was following then by a hike in policy rates. According to BR Research estimates, the dual effect of price increases and the rise in interest rate will increase the monthly burden of financing from Rs5,000 to Rs10,000 for new car buyers—all the way from the smallest engine size such as Suzuki Alto 660cc to a Toyota Corolla 1.8L. Higher engine sizes will cost more obviously (Read in detail: “Autos: New Year (warning) bells” Dec 30, 2021). But wait…
Contrary to the aforementioned Auto Development Policy that reduced FED to zero for all engines below 1000cc, sales tax down to 12.5 percent and FED down to 2.5 percent for engines above 1000cc, the latest announcement by the government will increase sales tax back to 17 percent for vehicles above 850cc, increase FED from 2.5 percent to 5 percent on engines between 1000cc-2000cc and from 5 percent to 10 percent for engines above that range. FED has also been increased for Completely Built Unit (CBU) imports from 25 percent to 30 percent for engines between 1000cc to 1800cc and from 30 percent to 40 percent for engines above that range. In addition, EVs and hybrids will also be taxed at higher rates.
Essentially, except for vehicles like Suzuki’s Alto and Bolan, nearly all domestically produced vehicles will see a price increase between 2 and 4 percent. Meanwhile, transfer tax on the registration of vehicle is also increased to Rs100,000 (from Rs50,000) for vehicles over 1000cc while advance tax will be charged for vehicles ranging from 1000cc to 2000cc of Rs200,000 (from Rs100,000) and from vehicles 2000cc above at Rs400,000 (from Rs200,000). These measures have been imposed to discourage premium or “own-money” in the auto market.
Even without these measures, demand was heading south, but higher taxation across the board will certainly affect car buying enthusiasm. But more importantly, what’s troublesome is that the government is no longer on board with itself and there are far too many conflicts within the government machinery for it to present a united, consistent front. The entire motivation behind a new auto policy was to ramp up volumes substantially enough for localization to happen. The sudden reduction in taxation—a few months ago—and now an equally sudden increase in taxation is confusing for the industry at large to put any substantial investment in, not to mention that it contradicts what a carefully crafted five-year policy was meant to achieve.