Duty on CKD kits may be slashed: government may allow four-year old cars' import

The government is likely to slash duty on import of CKD kits of cars from 32.5 percent to 30 percent besides enhancing the age limit of used cars from three years to four years, sources in the Industries Ministry told Business Recorder. This has been the outcome of an inter-ministerial meeting presided over by Secretary, Planning and Development Division, last week.
These recommendations, sources said, would be tabled before the Economic Co-ordination Committee (ECC) of the Cabinet, which has been eagerly awaiting for the past several weeks. Local car manufacturers reportedly used their influence to the maximum to block the proposal, but several top decision makers, including Minister for Industries and Production Hazar Khan Bijarani were determined to bring down the prices of locally manufactured cars by allowing commercial import of used cars.
At least on three occasions, Bijarani had told this scribe that personally he is in favour of allowing commercial import of used cars so that defiant local manufacturers could be forced to slash the prices of different models.
He has been supported by Prime Minister Secretariat under new Chief Executive Officer (CEO) of the Engineering Development Board (EDB) Aitazaz Niazi. Niazi was implicated with Asif Ali Zardari in BMW case, initiated by the Ehtasab Bureau headed at the time by Senator Saif-ur-Rehman.
There is a perception that auto manufacturers are keeping their production down to create premiums as a source of earning, but the car industry argues that the assemblers plan their production based on market forecast, while maximising efficiency and optimising inventory levels.
One of the auto industry insiders told this scribe that the industry has a unique feature of long supply chain represented by local vendors, dealers and distributors. According to him, any of the parts not supplied by the vendors would lead to line stoppage and non-production.
"Approximately 12,000 parts and components are needed to assemble a car manufactured by over 1,500 local vendors. Since the industry has longer lead time for arrangement of parts from principals as well as local vendors, therefore, sometimes there may be delay in deliveries and investors are taking advantage of such delays and start charging premiums", he added.
'Premium' in Pakistan is being considered as 'Halaal' and a risk-free way of earning return on investment. Corolla is being considered as cash back product, based on its goodwill and state-of-the-art quality.
All auto assemblers are represented by world recognised brands. Pricewaterhouse Coopers is the auditor for Honda Atlas Cars Pakistan Limited and Indus Motor Company Limited. Similarly, Ernst & Young are the auditors of Pak Suzuki Motor Company Limited. All assemblers are listed at Karachi, Islamabad and Lahore Stock Exchanges, following best practices and are compliant of code of corporate governance. None of the financial statements of the company signify any earnings on 'car premium or on money account', analysts say.
However, it s very difficult for an assembler to distinguish between genuine buyer and an investor. Therefore, checks on double booking through restricting one vehicle to one CNIC and National Tax Number and 100 percent advance payment restricts speculative buying of cars, he added.
As per Engineering Development Board approvals, the assemblers increased their plant capacity by almost three times [2001-02: 93,000 units; to 2009-10: 341,000] with an annual demand of approximately 150,000 cars in Pakistan.
The Competition Commission of Pakistan (CCP) has suggested that import of used cars will eliminate 'premiums' but the industry says that premiums are a perception, not reality.
Pak Suzuki, Honda and Indus are manufacturing 20,000 units a month, which implies that few investors would change the auto market of Pakistan. If an investor starts booking two or three different models of cars, these models would automatically become in short supply.
These investors are also hedging their exposures through product and company mix. If auto assemblers increase their production of one variant like Suzuki Cultus then investors would start booking Baleno and keep disturbing production cycle of auto assemblers wherein there is always a longer lead time for arrangement of parts from foreign principals as well as local vendors. Therefore, the CCP suggestion would not be practicable, he added.
"The government should remove regulatory duty (RD) on high-end vehicles and impose additional tax on first transfer of car within six months like recently imposed short-term capital gain tax (CGT) at stock exchanges," he proposed.
He said that removal of regulatory duty would make the high-end cars affordable to customers. This strategy would not have any impact on local assemblers and vending industry of 800cc to 1800 cc cars. Such a policy would also generate additional revenue for Federal Board of Revenue. Data shows that RD has reduced FBR revenue on this account, he added.