45% of cost goes to govt in form of duties, taxes
As the current Auto Development Policy (ADP 2016-21) is about to end in June this year, the government is preparing a new auto policy that will focus on facilitating the manufacturing of low-cost cars.
According to multiple industry sources, roughly 45% of a car price that a buyer pays goes to the government in the form of duties and taxes. The government charges duties on imported CKDs (completely knockdown units), which are the auto parts used in assembling cars.
The Customs duty on import of localised parts is 45%. The duty on non-localised parts is 30%. There is an additional 7% duty on the import of parts. The Federal Excise Duty is 2.5% for cars up to 1000cc, 5% for cars between 1000cc and 2000cc, and 7.5% above 2000cc. Then, there is a 17% sales tax.
“The small (entry-level) cars have been neglected in the past. Thus, providing limited choices with high prices to the customers. The new policy must focus on manufacturing of entry-level cars,” read a document prepared after the Auto Industry Development Committee (AIDC)’s recent meeting.
An industry source said that the government can influence cars price by reducing taxes and duties.
“By the time a buyer buys a car, around 45% of the total car price he or she pays to the government. It is a bit higher for bigger cars,” said an industry source. It means the government has a significant space to tweak the car price.
To bring a Rs1.5 million car, a price range for a commonly acceptable contemporary hatchback, within the range of Rs1 million will be a difficult task to achieve. To achieve that, the government has to significantly reduce duties and taxes.
The ADP 2016-21 policy will be ending this year in June, and now Engineering Development Board (EDP) and Ministry of Industries and Production have started to work on the new Automotive Industry Development and Export Plan (AIDEP) for the next five years.
“The prices of vehicles in Pakistan are on the higher side. The government may consider a reduction in Customs duty, removal of Additional Custom Duty (ACD) and Federal Excise Duty (FED) for the entire auto sector in upcoming AIDEP,” the committee noted in the meeting.
“With an overall view of reducing the input costs, in return, the government expects reduction in prices by the OEMs (Original Equipment Manufacturers) [car making companies], increase in localisation and concerted effort to increase exports”.
“The local vehicle manufacturing companies should strengthen their ties with local part manufacturers to enhance localisation, which will lead to cost reduction, price stability, and employment generation,” the AIDC document read.
The new entrants such as Hyundai, Kia, Changan, United Motors have received Greenfield status, which lets them pay lower duties on import of CKDs. Duty on localised parts is 25%, and 10% on non-localised parts for new companies with Greenfield status.
An official of one of the new entrants said that it appears that there’s a 20% difference between old and new auto players but there are certain SROs that favours old players, reducing the difference to around 15%.
The committee says the new entrants under ADP 2016-21 will be facilitated through continuity of the policy to ensure the confidence of the investors. “They should however prepare to merge with the mainstream at the end of their five-year period,” it added.