Automakers on Friday lamented the recent government decision to increase sales tax to 25% for the sector, saying the hike in taxation would make cars more expensive and leave significant impact on their sales.

In its recent meeting, the Economic Coordination Committee (ECC) gave its nod to a summary related to an increase in the sales tax of cars above 1,400cc or price of Rs4 million or above by 7 percentage points to make it 25%.

The ECC decision came at a time when car sales have been struggling owing to several factors.

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The ECC decision irked the country’s automakers who said the hike in taxation would have a negative impact on car sales, which are already showing a declining trend.

“It will backfire even for the government. It will reduce sales further as cars will become more expensive, which will subsequently reduce tax collection from the auto sector,” a source privy to the matter told Business Recorder.

The source said cumulative duties and taxes on cars are now constituting over half of the overall car price.

“Such a decision is difficult to understand especially without taking the industry on board,” the source added.

It may be noted that car sales in Pakistan have declined 47.6% year-on-year in the first seven months of the financial year 2024 as compared to the same period the previous year, as per data from the Pakistan Automotive Manufacturers Association (PAMA).

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PAMA, a representative body of the automakers, has also written a letter to Caretaker Finance Minister Dr Shamshad Akhtar, a copy of which is available with Business Recorder.

The letter said the hike in sales tax would also affect the locally produced passenger cars, increasing their prices in the market that is already marred by galloping inflation.

“It is like ‘killing someone dead’,” read the letter, adding that the automobiles have elastic demand whose sales would further go down with increase in the prices; hence the increase in the sales tax would be “counterproductive”.

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“It may be added that taxes on locally produced cars have further increased while the taxes on import of used cars have remained unchanged thus making a case of negative protection to locally made cars,” PAMA letter stated.

The letter said used cars, which come under the pretext of baggage, gift, and transfer of residence scheme, were snatching the market share of locally produced cars.

“The market share of used cars was around 10%, which has gone up now to 30% causing loss of foreign exchange and loss of legitimate revenue to the government.”

PAMA said the government’s expectation that the increase in sales tax would additionally generate revenue of Rs4 billion was “surprising”.

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“It is highly unlikely. We are apprehensive that the measure would eventually result in drop in the volumes with consequent drop in the revenues. The measure in question would only be hurting the economy, enhancing negative sentiments for consumers and losing investor confidence in investment in Pakistan,” the letter said.

PAMA said a proposal to increase the rate was earlier turned down when it was discussed with the industry representatives.

“We would sincerely appreciate it if the measure to increase the rate of the sales tax is withdrawn,” urged PAMA in the letter.