A few days ago, a new SRO 1067(1)/2017 was introduced by the Ministry of Commerce that has created a lot of noise in the car importing and commercial sale business. The regulation that was imposed as an amendment to the Import Policy Order (IPO) 2016 intends to stop the outflow of foreign exchange.
First let’s look at the complex history of car imports in Pakistan. It is an open secret that most of the nearly 65,000-70,000 cars imported into the country are through the illegal use of one of the three overseas Pakistani schemes—i.e. the personal baggage, gift or transfer of residence schemes.
To qualify for these schemes, documents of Pakistanis living abroad are used by dealers and these vehicles are sold commercially across the country. The duties paid under these schemes are much lower and fixed based on the engine size rather than the cost of the car (see table). If one were to import vehicles against proper channels (which authorized dealers in Pakistan do), duty paid would be significantly higher and lie between 50 percent and 100 percent along with regulatory duties imposed under recent regulations (SRO 1035(1)/2017 and SRO 504(1)/2017).
This large informal economy of car imports has existed for years and the government has done virtually nothing to formalize it. Dealers across the country following the burgeoning demand of cars, import vehicles into the country through these schemes and avoid actual duties as well as sales tax. In fact, by some estimates, the government loses Rs20 billion every year in additional revenue due to this. Importers also use the Hawala/Hundi system to pay for these vehicles which the government believes results in the smuggling of foreign currency out of the country.
Enter this new regulation. It states: “All vehicles in new/used condition imported either under personal baggage or gift scheme, their duty and taxes will be paid out of foreign exchange arranged by Pakistan nationals themselves or local recipient supported by bank encashment certificate showing the conversion of foreign remittance to local currency”. In other words, the duty paid on imported cars would also come from abroad, and buyers will have to demonstrate the money trail at the time of paying the duty.
But as we have learnt, this is a largely illegitimate business and establishing that the duties and taxes are coming into Pakistan, paying them in foreign currency or showing encashment will prove to be tricky.
Critics of the policy speaking to BR Research contend that the demand for dollar in the open market would increase as importers will have to buy dollars to pay duties in foreign currency. This would put pressure on the dollar. In fact, they argue that the government’s assertion that foreign currency was moving out of the country was inaccurate. Since these transactions were operating under the informal Hawala/Hundi system, dealers paid for the vehicles in local currency which was converted to foreign currency by investors, suppliers and middlemen living abroad.
As per a letter to the Prime Minister by All Pakistan Motors Dealers Association, much of the imports have been halted due to this regulation and thousands of cars are already stuck on foreign ports. Whereas the government would lose billions in revenues due to this policy change, employments of thousands of Pakistanis are tied to this business which they are in danger of losing. Once official numbers for imports come in, we will be able to better determine the impact of this regulation and whether it resulted in a reduced outflow of foreign currency or not.
But even if this measure meets those targets, the root of the problem remains unaddressed. Due to the existence of this nearly $2 billion black economy, the government is losing a hefty chunk of revenue, indirectly penalizing authorized dealers and importers who go through direct channels and encouraging the continued use of informal money transfer systems. The government must double down on this illegal machinery which remains the only viable long term solution of this convoluted problem.
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