FED continues to haunt auto industry

Federal Excise Duty (FED) continues to haunt the auto industry. The situation needs correction or it my hurt, not only the auto sector but manufacturing sector in general, according to stakeholders here. "FED has put the country's first Sports Utility Vehicles (SUV) manufacturing project in danger of discontinuation. It has hit the sales of Toyota Fortuner, which was launched in March, 2013, drastically, making it almost impossible for the manufacturer to continue with it," says the Director General of the Pakistan Automotive Manufacturers Association (PAMA).
It's not just the industry that is being affected, he adds. The estimated loss to the government through this decision is Rs 230 million per month while the annual loss is Rs 2.8 billion. The future of such projects is now in doldrums because of FED, he explains. How do we expect to lure foreign investors to Pakistan if we can't guarantee returns on their investments? he asked.
The beginning of 2014 saw Pakistan auto industry pleading with key policy makers in the government to devise a long-term, sustainable auto industry development policy. The process has been far from easy given that powerful lobbying from car importers has caused the government to sway easily through this decision. So while the government is gearing up to present the fiscal budget for 2014-15 on June 3 the auto industry has put on the table a set of recommendations. This, hope industry players, will lend much-needed support to the auto sector and possibly lead to the development of a clear-cut policy that levels the playing field for everyone.
The focal point remains the 10 percent FED that was levied through the Finance Act (2013) on locally manufactured vehicles ranging from above 1800cc. Auto makers lament that this duty has taken its toll as prices have soared and sales of locally manufactured vehicles have plummeted. The increase in price has been passed on to the consumer because of which they have turned towards imported vehicles. "Companies that are market leaders in the above 1800cc segment have suffered the most," explains Secretary General of the Overseas Investors Chamber of Commerce and Industry (OICCI) Abdul Aleem.
OICCI has also submitted a set of detailed taxation proposals to the Federal Board of Revenue (FBR), says Aleem, in which it has advocated the need for the elimination of FED on locally manufactured vehicles that are 1800cc and above and fall under the HS 8703 category. "The consumer will benefit from high-end locally produced vehicles at reasonable prices and will lead to higher volume of such vehicles, with significant additional contribution to the national exchequer. The local industry geared up with considerable efforts to produce high-end vehicles with huge investments, will be able to sustain and confidence of investors will be restored," reads the proposal.
At the end of the day, this move will benefit the consumers, points out Aleem. "They will be able to buy locally manufactured vehicles without burning a hole in their pockets." Industry analysts agree with this, pointing out that if the FED is eliminated, then the price of above 1800cc vehicles could go down by as much as Rs 400,000.
Meanwhile, the industry is also proposing a revision of SRO 499(I) issued in 2013 to allow for a sales tax relief on import and supply stage of Hybrid Electric Vehicles (HEV). Under the SRO, sale of these vehicles by a registered person is subject to a 17 percent sales tax while importers enjoy a concession.
This encourages the undocumented used car market at the expense of the registered sales people who are being heavily taxed. No matter how you look at it, it is giving unfair advantage to the used car importers, explains capital analyst Atif Zafar. "The playing field should be level for everyone," said Aleem, adding that the tax should be done away with for the sake of healthy competition. HEVs are fuel efficient and environment friendly so why not promote their use by allowing relief to the sector and making them affordable for the masses?
Before the government gets ready to announce the budget for the coming year, perhaps it would be appropriate for it to decide whether it wants to nurture the manufacturing sector in general, including the auto industry? Perhaps it should indicate whether it wants an economy based on manufacturing or trading?
Employment and transfer of technology will follow if the government helps create an economy based on manufacturing and the policies thus implemented reflect government's good intentions. Only then will cars become more affordable, localisation will increase and the nation will benefit, said the stakeholders.