Increase in depreciation rate to be the 'death warrant': car assemblers express fear

Pakistan's car assemblers fear that increase in depreciation from one percent to two percent may prove the 'death warrant' for local industry, which is already suffering from a downswing in demand due to recession, on the one hand, and severe energy shortage, on the other.
At present, the rate of depreciation in assessable value is one percent, but the Commerce Ministry has proposed that it should be increased to two percent to further bring down the price of imported cars. However, the Federal Board of Revenue (FBR) is not siding with the Commerce Ministry and other ministries on this controversial proposal.
An analysis of revised import policy suggests that total loss to the national exchequer would be around Rs 21.6 billion, in the event of an increase in the age of imported cars to 5 years and depreciation by one percent, whereas the loss will jump to Rs 23.1 billion, if depreciation is increased by one percent and the age of cars to five years.
Commercial importers are busy purchasing passports from Pakistani residents in Japan, UK and Dubai to become eligible to import reconditioned cars to Pakistan and sell them at cheaper rates compared to the locally assembled cars. Currently, three key assemblers are present in the market ie Toyota, Suzuki and Honda. When the government exerted pressure on the assemblers for reduction in prices of their different models due to public pressure, Toyota was the leader in reducing prices, followed by Honda. However, Suzuki Motors, which has captured the middle income market, increased the prices, instead of reducing them, citing different reasons.
After waiting for months and hoping that the local assemblers would reduce the prices, the government decided to move forward and teach them a lesson, said an Industries Ministry official. Local assemblers argue that import of five-year old used cars by 'misusing' personal baggage and gift schemes of Commerce Ministry will negatively impact on local production.
"Pakistan has to put restrictions on import of used vehicles, restrict ourselves to a variety of models (limited models will be available in Pakistan)," said a representative of a local assembler. According to the local auto industry, approximately 34 percent of the retail selling price comprises of GoP taxes (32.5 percent and 50 percent CKD duty, 17 percent sales tax, one percent special excise duty, 35 percent income tax on profits, 2 percent workers' welfare fund on tax liability, 5 percent workers' profit participation fund on profit before tax.
Protection to local manufacturing varies from 17.5 percent to 27.5 percent (CKD duty v/s duty in Pakistan whereas it is 90 percent to 95 percent in India and 50 percent in Thailand. Local assemblers have raised a number of questions with regard to increase in age limit from 3 to 5 years: (i) they question the source of wealth of these commercial importers; (ii) how are these commercial importers participating in Japan/Europe bargain houses; (iii) how would the payments to such bargain house be transferred - through 'Hundi' and 'Hawala' modes, or through maintenance of foreign current accounts? (vi) how did commercial importers purchase passports from overseas Pakistanis for such transactions; (v) how did commercial officers of Pakistan's embassies approve documents for transfer of residence, baggage and gift schemes; and (vi) how are these imported vehicles under different schemes openly traded at roadside showrooms and registered with Excise authorities.
The Ministry of Industries and Production says that an increase in age limit of used imported cars will not have negative impact on local assemblers' sales, as was witnessed in the past.
On the other hand, local assemblers are contradicting the MoI&P's claim, saying that in 2005, bank financing was one of the reasons for the growth in locally assembled cars. "I predict a stiff match between the government and local assemblers in the days to come on the issue of increase in age limit from 3 to 5 years and likely increase in depreciation," an official of the Industries Ministry said.