The Enginee-ring Development Board (EDB) has prepared a five-year draft Automotive Development Policy (ADP 2014-19), which envisages incentives for the new investors, tightening the screw on existing ''exploitive cartel'' and import of used cars, sources close to the Minister for Water and Power told Business Recorder.
The sources said on October 2, 2013, the ECC constituted a committee comprising Minister for Water & Power (Convenor), Chairman BoI (Deputy Convenor), Secretary Industries & Production, Chairman FBR, and CEO Engineering Development Board to finalise draft Automotive Development Policy (ADP 2014-19) and submit it to the ECC.
According to sources, the committee also co-opted secretaries of commerce and science & technology for better inputs across the spectrum. It held several in-house meetings and convened consultation sessions with representatives of the automotive industry and auto-dealers. These meetings allowed the committee to comprehend the nature and extent of conflicting viewpoints - not only amongst various sections of the Industry, but also amongst the ministries/divisions.
The major disagreement was on the question of short-term revenues through higher tariffs versus long-term revenues through rationalisation of tariffs leading to expansion of the automotive sector. A second point of disagreement was whether the future investment regime should exclude the current Original Equipment Manufacturers (OEMs) who were widely regarded as an exploitative cartel.
A third point of disagreement was used vehicles import policy: whether allowed age should be 3 years or 5 years; whether open import be allowed or the current policy for expatriates should continue; and whether the current policy should be tweaked or made more stringent to realise its true intention. Skepticism was also expressed about automotive market size and it was asserted that further avenues of expansion did not exist due to demand saturation.
The answers to other questions are incorporated in ADP''s Policy objectives: (i) ensure horizontal and vertical growth of the automobiles and parts manufacturing in terms of volumes, investment, quality and technology; (ii) create a balance between open trade and industrial growth with minimal risk to local industry and Pakistan''s economy; (iii) increase government revenues; (iv) ensure consumer welfare through quality, safety, choice and value for money; and (v) provide policy consistency and predictability
To achieve the policy objectives, ADP proposes 8 strategic interventions: (i) lower entry threshold through New Investment Policy; (ii) create enabling Tariff structure for development of the automotive sector; (iii) rationalise automobiles import policy; (iv) develop regulatory and enforcement mechanisms for quality, safety and environmental standards; (v) create R&D, design and testing infrastructure; (vi) develop human resource and training infrastructure; (vii) introduce technology acquisition support scheme particularly for Auto-Part Manufacturers (APMs); and (viii) consumer welfare.
The Policy does not differentiate between an existing OEM and a new investor setting up manufacturing operations. The differentiation is actually made on the type of investment. Setting up a completely new manufacturing plant (termed Category-A investment) attracts higher incentives than a Category-B Investment, meant for up-gradation of existing facilities for production of a new variant, not produced locally before.
Tariff structure is rationalised to create balance among conflicting interests within the industry and amongst government departments/divisions. It is based on cascading principle to avoid anomalies. It is revenue positive in short and long terms and will enhance revenue collection of the Government. The cornerstone of this policy is to ensure that over-protection is not provided to a new or existing player so as to restrict the tendency towards complacency and encourage competition.
Tariff structure in the past was meant to protect local manufacturing industry by making imports of CBUs and CKDs expensive. Instead, it created cartels. High tariffs allowed the local manufacturers to keep on increasing prices at will. At the same time, higher tariffs made imports beyond the reach of many consumers and limit choices. There is an inverse relationship between the two: higher tariffs discourage imports and reduce government revenues. Historical data shows that when tariff rate increased from 75 percent to 90 percent in 2007-08, imports came down from 5,881 to 3,839. Similarly, when the previous government doubled the tariff rate, imports immediately dropped to 1269 and then became as low as 406. They may have picked up a little, still FBR is now receiving only 1/5th the amount of customs duties it collected in 2005-06.
Since there was a possibility of other factors influencing import trends, a more robust analysis was performed in the form of two multiple regression models for below 1,000cc and above 1,800cc cars to see the impact of: (i) tariff rates (ii) exchange rates (iii) banks lending rates and (iv) allowable depreciation on level of imports. Both models have R2 of 0.990784252 and 0.99911123 respectively, which means that they can forecast future import values with 99 percent accuracy.
With suggested tariff system for cars above 1800cc and maximum allowable depreciation of 36 percent, the model predicts import of 4,235 vehicles as against 1,248 vehicles based on July-October data. In other words, FBR could collect 262 percent more revenue through rationalised tariffs on above-1800cc class of cars/SUVs alone. The proposed tariff structure also provides reasonable and due protection to the automotive industry, especially cars manufacturers who are more vocal in raising storms in teacups. It transpires that with rationalised/reduced tariff rates, even 3-years old imported cars may still be more expensive than brand-new local cars.
A new investor under ADP 2014-19 establishing maiden assembly facility will invariably need separate treatment and greater incentives in the early years to enable it to introduce its brand, develop a market niche or share, create a distribution and after sales service networks and develop a parts-manufacturer base.
Investors have been divided into category A&B Category-A Investor, whether an existing OEM or a new entrant in the automobile sector, will be entitled to the following incentives: (i) import 100 parts, whether or not locally manufactured, at 10 per cent rate of customs duty for a period of a five years from the start of assembly/manufacturing operations in respect of passenger cars and LCVs; (ii) import 100 per cent parts whether or not locally manufactured at prevailing custom duty applicable to non localised parts for a period of five years from the start of the assembly/manufacturing operations in respect of motorcycles and its derivatives, auto rickshaws, buses, trucks, tractors and prime movers; and (iii) all incentives, facilities and tax exemptions available under Special Economic Zone Act will be available to all category-A investors, including 100 per cent exemption from customs duties on the import of plant machinery, equipment and tolling such as dyes, molds, jigs and fixtures for production and testing of vehicles.
Category B investors;
Import policy for used vehicles Pakistan''s Import Policy Order allows import of used cars into the country by expatriate Pakistanis alone. These facilities, however, have been transformed into a commercial activity by unscrupulous elements. Used cars import dealt a major blow to cars and SUVs sector during 2011-12, when imports reached an unprecedented figure of 57,000 cars due to relaxation in age limit from 3 to 5 years. Such high imports not only have a negative bearing on the OEMs but also adversely impacted the indigenous vendor industry by reducing demand for locally made parts and components.
According to the ADP, import of all types of vehicles will be regulated by the following used vehicles import policy 2014-19: (i) no used vehicles older than three years will be imported into Pakistan; (ii) no used vehicles shall be imported into Pakistan except through personal baggage scheme, transfer of residence scheme and gifts scheme; (iii) one per cent depreciation per month will be allowed to a maximum of 36 per cent irrespective of the country of origin; (iv) duty for imported vehicles will be paid in dollars by the expatriate importer through banking channel; (v) Federal Board of Revenue (FBR) will issue yearly schedule of import duties of all type of vehicles in dollar terms on June 30, of each year, applicable at least for next six months; and (vii) no special relaxation regarding age and applicable duty shall be granted under any circumstances.
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PROPOSED TARIFF ROADMAP FOR CBUs & CKDs (LOCAL & NON-LOCAL)
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DESCRIPTION Existing 2014-15 15-16 16-17 17-18 2018-19
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Rate of Duty
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(A) Passenger Cars & other Motor Vehicles falling under HS Code 8703
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1 Raw Material 0% 0% 0% 0% 0% 0%
2 Sub Component 5% 12.5% 12.5% 12.5% 12.5% 12.5%
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Single Category of "components
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3 Component 10%
4 Sub-Assembly 20% 20% 20% 20% 20% 20%
5 CKD (Non-Localised All Engine capacities 32.5% 30% 30% 30% 30% 30%
6 CKD (Localised) All Engine capacities 50 % 35% 35% 35% 35% 35%
7 Parts Specific to Hybrid/ Electric
Vehicles (HEVs) SRO 656 (1)/2006 No Duty 0% 0% 0% 0% 0%
Specified
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Notes: Still to be deceased for 10%
Distinction between sub-components and Components abolished.
CKD (non-localised) rates reduced by 2.5% while Components rates increased by 2.5% and Sub-components rates increased by 7.5%.
Revenue Impact: Positive
Intention of these changes is to encourage value addition from raw material onwards.
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Cars for lower income group
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1 CBU up to 700cc 50% 35% 35% 35% 35% 35%
2 CBU 701cc to 800cc 50% 40% 40% 40% 40% 40%
3 CBU 801 to 1000cc 55% 45% 45% 45% 45% 45%
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Notes: New Category of up to 700 cc created for lower income consumers.
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Cars for Middle income group
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4 CBU 1001cc up to 1300cc 60%
5 CBU 1301cc up to 1500cc 60% 55% 55% 55% 55% 55%
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Cars for Higher income group
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6 CBU 1501cc up to 1600cc 75%
7 CBU 1601cc up to 1800cc 75%
8 CBU 1801cc up to 2000cc 70% 70% 70% 70% 70%
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Cars for Affluent Classes
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9 CBU 2001cc to 3000cc 100% +50 RD 100% 100% 100% l00% 100%
10 CUU above 3000cc 100% +50 RD 125% 125% 125% 125% 125%
11 Hybrid /Electric 50% of - - - -
prevailing
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(B) Prime Movers falling under HS Code 8701
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1 Raw Material 0% 0% - - - -
2 Sub Component 0% 0% - - - -
3 Component 0% 0% - - - -
4 Sub-Assembly 0% 0% - - - -
5 CKL (Non-Localised) below 280 HP 10%
6 CKD (Non-Localised) 280 HP & above 0% 10% 10% 10% 10% 10%
7 CKD (Localised) All Categories 35% 35% 35% 35% 35% 35%
8 CBU below 280 HP 30%
9 CBU 280 HP and above 15% 20% 20% 20% 20% 20%
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(C) Agriculture Tractors falling under HS Code 8701
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1 Raw Material 0% 0% 0% 0% 0% 0%
2 Sub Component 0%
3 Component 0% 0% 0% 0% 0% 0%
4 Sub-Assembly 0% 0% 0% 0% 0% 0%
5 CKD (Non-Localised) for (Euro II and above)
All Engine Capacities 0% 0% 0% 0% 0% 0%
6 CKD (Non-Localised) for (below Euro II)
All Engine Capacities 0% 5% 5% 5% 5% 5%
7 CKD (Localised) All Engine Capacities 35% 35% 35% 35% 35% 35%
8 CBU (Euro II and above) 0% 0% 0% 0% 0% 0%
9 CBU (Below Euro II) 0% 10% 10% 10% 10% 10%
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(D) Buses falling under HS Code 8702
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1 Raw Material O% 0% - - - -
2 Sub Component 0% 0% - - - -
3 Component 0% 0% - - - -
4 Sub-Assembly 0% 0% - - - -
5 CKD (Non-Localised) 5% 5% 5% 5% 5% 5%
6 CKD (Non-Localised) (Dedicated LPG or LNG Buses) - 0% 0% 0% 0% 0%
7 CKD (Localised) All Categories 35% 35% 35% 35% 35% 35%
8 Parts Specific to Hybrid Electric
Vehicles (HEVs) under SRO 1656 (1) /2006 - 0% 0% 0% 0% 0%
9 CBU 20% 25% 25% 25% 25% 25%
10 CBU (Dedicated LPG or LNG Buses) 0% 0% 0% 0% 0% 0%
11 CBU (Hybrid /Electric) - 0% 0% 0% 0% 0%
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(E) HCVs (Rigid Trucks above 5 Tons GVW) falling under HS Code 8704
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1 Raw Material 0% 0% - - - -
2 Sub Component 0% 0% - - - -
3 Component 0% 0% - - - -
4 Sub-Assembly 0% 0% - - - -
5 CKD above 2 Axles (Non-Localised) 10% 5% 5% 5% 5% 5%
6 CKD (2 Axles) Non-Localised) 10% 15% l5% 15% 15% 15%
7 CKD (Localised) 35% 35% 35% 35% 35% 35%
8 Parts Specific to Hybrid Electric
Vehicles (HEVs) under SRO 1656 (1)/2006 - 0% 0% 0% 0% 0%
9 CBU (above 2 Axles) 30% 15% 15% 15% 15% 15%
10 CBU (2 Axles) 30% 30% 30% 30% 30% 30%
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(F) Motorcyc1es and Auto-Rickshaws falling under HS Code 8711
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1 Raw Material 0% 0% 0% 0% 0% 0%
2 Sub Component 5% 10% 10% 10% 10% 10%
3 Component 10%
4 Sub-Assembly 15% 15% 15% 15% 15% 15%
5 CKD (Non-Loca1ized)
Motorcycles / Auto Rickshaws 15 to 20% 20% 20% 20% 20% 20%
6 CKD (Localised) 47.5% to 50% 35% 35% 35% 35% 35%
7 CBU Motorcycle (87.11) 65%
8 CBU Motorcycle Rickshaw 65%
9 CBU Auto Motorcycle Rickshaw 50% 50% 50% 50% 50% 50%
10 CBU Cargo Loader 50%
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(G) Trailers falling under HS Code 8716
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1 CBU 15% 15% 15% 15% 15% 15%
2 CKD (Non-Localised) 5% 5% 5% 5% 5% 5%
3 CKD (Localised) 35% 35% 35% 35% 35% 35%
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