The stakeholders in the auto-industry and the government representatives are expected to meet on Tuesday (tomorrow) to discuss the methods to curb massive non-documentation and on-money phenomenon in passenger cars sector. The meeting is also likely to discuss the proposed 'Distributorship Mechanism' by the industry which is believed to enhance the government revenue besides increasing tax base in the country, the sources in industry told Business Recorder here on Monday.
Presently, the country has a market of approximately 150,000 passenger cars and light commercial vehicles out of which 60 percent are exposed to premium and on-money amounting to about Rs 3 billion. The premium, for being out of tax net, is causing a loss of Rs 1 billion at the rate of 35 percent to the national exchequer. The current tax-to-GDP ratio is less than nine percent, which is much lower than the average 17-18 percent for countries at Pakistan's level of development. The low tax collection does not allow government the fiscal space that it requires to provide relief to the citizens of Pakistan. Low tax collection also delays investments needed in infrastructure to lay the foundation for the optimal growth rate of at least 8 percent per annum, a growth rate which is crucial if Pakistan is to move to the next level of developed countries, sources added.
Pakistan is a nation of 180.0 million people and less than 2.0 million people are registered taxpayers. The solution lies not in increasing the tax rate, but broadening the tax base. Currently there are certain sectors which are out of the tax net or paying very nominal tax under the umbrella of fixed taxation. Automobile dealers, who are investors, as well, are among such nominal taxpayers with huge capacity to earn premiums, the sources said.
Chairman Federal Board of Revenue is quite acquainting of the fact, as being in association, as automotive dealer, with one of the renowned Japanese auto assemblers in Pakistan. FBR records are also evident that LTUs/RTOs in Karachi and Lahore had already issued notices to such dealerships, selling vehicles on fake identity cards or through investors, the sources said.
Both the government and the auto assemblers are unable to resolve the threat. Currently, customers are booking orders to the auto assemblers through dealerships. These dealerships are working as commission agent and paying 10 percent of commission value as full and final taxation. The commissions of these dealerships are ranging from Rs 5,000 to Rs 25,000 on an average vehicle price of Rs 1.5 million. This nominal commission induces the dealerships to go for premiums, as all dealers had made huge investments in lands, infrastructure, paint shop, bumper booth, service stations etc.
If the auto assemblers change their current system of vehicle booking from customer to assemblers and shift to 'Distributorship Mechanism' ie 'whole sales retail mechanism' wherein the vehicles will be sold by the dealers directly to the customers and keep inventory of vehicles at their dealerships.
Under the distributorship mechanism, the dealers will bring white money to their business and the customers will purchase vehicles directly from the dealerships. This will create healthy competition among dealerships as the customer will select those dealerships that have stock in hand and offers are genuinely lucrative. Currently there is zero investment by dealerships, thus, least bothered about the goodwill or customer satisfaction. Under the mechanism, the dealers will make an investment in their business in the form of inventory holding, which induce the dealerships to sales the vehicles at retail selling price, instead to hold for premiums or on money.
Under the proposed mechanism, the dealers will earn profit on sales of vehicles. The profit will be subject to normal taxation at the rate of 35 percent of profit, 5 percent Workers Profit Participation Fund, 2 percent Workers Welfare Fund along with Sales Tax at the rate of 17 percent and Special Excise Duty at 2.5 percent of vehicle sales value. The premium will be removed, as the dealers who are currently investors, will make 'white investment' in their business and their focus will than be towards sales/customer satisfaction and not on holding inventory for premiums.
The government may reduce turnover tax to 0.2 percent of turnover which is more than current fixed on commission ie Rs 2,500, considering the fact that mechanism will enhance documentation of economy, remove premiums and consolidation of dealership business with their 'white investment' for holding vehicles as stock in hand, the sources said.