PAMA urges govt not to amend basis of withholding tax

Automobile companies have urged the Federal Board of Revenue (FBR) against changing the basis of the levy of withholding and other taxes on locally assembled vehicle in the upcoming budget 2023-24.

In a letter penned by the Pakistan Automotive Manufacturers Association (PAMA) to the FBR on Friday, carmakers said market news suggested that the basis of levy of taxes and duties on cars will be changed from engine-size to invoice price of vehicles.

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“Respectfully, we draw your kind attention to the subject on the worrisome news that the basis of levy of withholding and other taxes and duties on the locally produced automobiles is proposed to be changed (in the budget 2023-24) that would badly impact the sales of already tormented auto industry of the country,” PAMA letter read.

The budget is set to be unveiled on Friday June 9, 2023.

Due to multiple rounds of price hikes, inflation, interest rate increases and supply chain issues, car sales in Pakistan have dropped significantly.

Automobile bookings dropped to 2,844 units in April 2023 against 18,626 units in April 2022, according to the latest data released by PAMA.

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Meanwhile, in the first ten months of fiscal year 2022-23, a total of 88,620 units were sold, which is 54% lower than 191,238 units sold during the same period of previous fiscal year.

Presently, withholding tax (WHT) is levied on engine capacity basis of an automobile as per 231B of income tax ordinance, whereby the amount of tax levied is known to each filer and non-filer buyer of an automobile.

A proposal, reportedly under consideration for the forthcoming budget, is to amend tax structure to charge WHT on invoice price instead of engine capacity.

The letter, a copy of which is available with Business Recorder, stated “we are requesting you not to move forward with this proposal as it would substantially increase the WHT amount and inevitably raise the sale price of cars that will badly impact the sales.”

Charging WHT on invoice price is also against the simplicity and convenience of the levy, the letter stated.

“It is strongly recommended to maintain or further reduce the existing withholding tax structure under 231B without changing the rates,” it added.

The automotive industry faced a contraction during the Covid-19 time period (2019-20 and 2020-21), before it saw revival during 2021-22. Owing to imposition of import restrictions in 2022-23, the sector is facing a decline once again.

“Due to the restrictions, skyrocketing inflation and other macroeconomic maladies in the country, the industry is going through worst times,” the PAMA letter read. “Several of our members are have reported losses worth billions of rupees.”

“It may, therefore, be seen that any further increase in the amount of taxes shall badly impact the industry which is already paying over 40% per unit tax,” it said. “We expect an industry and investment friendly budget without imposition of any further tax and duty.”

Much like the economy, Pakistan’s auto industry is also undergoing turbulent times. It is one of the sectors most affected by rapid depreciation of the rupee and Letter of Credit (LC) issues, which arose due to depleting foreign exchange.

The auto industry is heavily reliant on imported parts and material to assemble vehicles at local plants. It is currently facing immense supply chain issues amid exchange rate volatility and depleting foreign exchange reserves.

The low level of forex reserves in Pakistan has forced the government to place restrictions on opening of letters of credit (LCs) through the State Bank of Pakistan for several sectors including automobiles. This has also disrupted the supply chain for auto companies.