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Pakistan automobile industry still infancy must review policies, laws and regulations

Pakistan automobile industry still infancy must review policies, laws and regulations

  • Efficient logistics infrastructure can help keep manufacturing and import sustainable
  • Transparent system of vehicle examination rules still need to be developed and implemented
  • Sales tax cut by single digit can help boost automobile sector and country’s earnings

Interview with Mr Anwar Iqbal — Executive Director, Regal Automobile Ltd

PAGE: Tell me something about yourself and your auto business, please:

Anwar Iqbal: I am associated with automobile industry of Pakistan for last thirty five years. I am playing a key role as pioneer of introducing low cost automobile for the Pakistani market. In the beginning of my career in automobile industry, I focused on two-wheeler and three-wheeler segment. I have been associated with some world famous auto brands like Fiat, Piaggio, Hyundai, Kia, FAW, Changan and Dongfeng in Pakistan. My role is to provide top notch guidance derived from my diversified and extensive entrepreneurial expertise, commercial experience and product development skills as required to guarantee the team that project shall achieve successfully the preset goals within the given time frame.

I have created a new horizon in two-wheeler industry and its market in Pakistan. I have introduced new brands and new market segments with innovative ideas. In 1999, I established my own company, and also I am in the Board of Director of Regal Automobile Industries where I have been designated as Executive Director.

PAGE: Could you tell us about the manufacturing and import of automobiles and auto parts?

Anwar Iqbal: Unfortunately, Pakistan automobile industry still does not manufacture complete auto. The entire auto industry comprises of assemblers. These assemblers produce trucks, passengers’ cars, motorcycles and three wheelers. This Pakistani automotive industry had total revenues of $5.4 billion in 2019, representing a compound annual growth rate (CAGR) of 11.3% between 2015 and 2019. Industry production volume increased with a CAGR of 16.3% between 2015 and 2019, to reach a total of 2.3 million units in 2019. The growth of the industry in recent years has been driven by an improving macroeconomic environment, which has enhanced private consumption. However new five-year automobile policy announced by Economic Coordination Committee (ECC) in March 2016 for the period from 2016 to 2021, has provided the help to increase the volume with improved quality, catch the attention of investors creating an extensive competitive environment, minimizing costs, technological improvement, satisfy all stakeholders through a balance between tariffs and growth, customer satisfaction and eliminating monopoly of existing car assemblers. Now you can see various new Chinese and Korean brands on the roads.

Regarding import of vehicles, new vehicles can be imported to Pakistan freely by anyone against payment of duty and taxes under generally applicable import procedures and requirements. Pakistani nationals residing abroad including dual nationals can import old and used vehicles into Pakistan under the following three schemes:

  • Personal Baggage
  • Gift Scheme
  • Transfer of Residence

Cars not older than 03 years and other vehicles not older than 05 years can be imported under these schemes.

The structure of duty and taxes under these 03 schemes remains the same.

Motorcycles and scooters can only be imported under Transfer of Residence Scheme the high cost of passports of Pakistanis residing abroad coupled with the devaluation has disturbed the costing of used vehicles. Its effect is now visible on consumer prices, which is causing a slowdown in the sales of used cars. Buyers are now reluctant to purchase used cars owing to high prices. Pakistan auto parts industry was formed in 1970’s during nationalization era. Initially manufacturers use to produce cylinder blocks, gears and castings.

Favorable conditions of privatization in 1990s, further expanded auto component industry. In 1995, Government of Pakistan came up with Product Specific Deletion Program (PSDP) to protect and strengthen infant auto parts industry. Even then the auto parts manufacturing industry is not able to cater the increasing demand of automobiles spare parts in the country. The demand for auto parts exists at local as well as international level. According to PAAPAM a trade body for auto part manufacturers, Pakistan manufactures only 0.4% of the total annual global production of auto parts, the export numbers are not very encouraging as compared to import of spare parts, which is approximately double.

Pakistan’s automobile manufacturing segment has a significant presence in the local market, which manufactures and assembles cars to meet the local need; thereby the manufacturers of these cars have outsourced the procurement of auto parts from local vendors, in turn the local vendors are not able to satisfy the local and international demand for spare parts.

The unorganized segment of auto parts manufacturers constitutes more than 1,200 establishments; SMEs comprise more than 90% of the segment. The units produce a wide range of parts for the replacement market. The auto parts segment of Pakistan constitutes more than 400 organized units, most of which are registered vendors to assemblers and manufacturers of automobile Pakistan auto parts market is segmented into two categories: auto parts manufacturers who supply parts to OEMs for assembling of new cars while the other provides reconditioned and original parts in local and aftermarkets. Unlike global tier-1 manufacturer, who supply range of parts by combining multiple parts, Pakistani auto component makers specialize in the production of single unit part. Initially, Pakistani firms entered in global automotive sector as tier-3 manufacturers as they use to supply raw material for auto parts. With globalization and growing demand for global value chain, few Pakistani firms managed to be tier-1 manufacturers with capacity to export.

PAGE: What are the logistics issues for manufacturing and import of automobiles and auto parts?

Anwar Iqbal: Logistics is not be just confined to physical infrastructure such as rails, roads and transport, sea trade and related freight, but is also include services such as packaging, delivery, storage and trade logistics. Factors like high freight, insurance, longer delivery times and renewal costs, is considered as important additional costs, which require careful review. The aggregate transport and logistics costs — including opportunity cost, service standards and trade facilitation — ultimately determine the efficiency of the transport and logistics sector, and also represent the cost of doing business in Pakistan. The bulk of imports and exports (95 percent) are handled through Karachi and Qasim ports, while the former handles three-quarters of the total volume. Because of the limited infrastructure development, these ports are congested and lack capacity to handle the ever-growing port traffic. Though ship handling charges have declined recently, but still there is a need for an efficient infrastructure to keep them sustainable. While the cost of transport and logistics services is decreasing worldwide due to global competition, these are generally higher in Pakistan as compared to the region because of the numerous inadequacies consequently, high transport costs are badly affecting the competitiveness of auto industry too. Resultantly it also has a negative impact on investment for the industry. Since the private sector participation is limited to some sub-sectors only, the transport and logistics sector puts significant pressure on the public sector funds.

PAGE: What kinds of efforts are required to promote this sector?

Anwar Iqbal: Safety standards are laid out in the Motor Vehicles’ Rules, which unfortunately are not standardized across the country. The first step should be to establish the standards and have these approved by sub-national governments. No vehicle is examined in Pakistan as there is no facility available, which can test these. Further, there is no trained examiner available with the Offices of the Motor Vehicles Examiner. It is suggested that help should be sought from such agencies as the Transports InternationauxRoutiers or International Road Transport (TIR) or the Transport and Road Research Laboratories to help establish these facilities and operate these for a few years. In the interim the human resource skills need to be established and a transparent system for examinations developed and implemented. The government does envisage the reduction of tariffs in the automotive sector in a five year time frame, as per an earlier ECC decision. But this process does not seem to go for enough with only minor reduction in tariffs in the terminal year from the present level and large inter-vehicle differentials will persist according to this scheme of up to 70 percent. To reduce this spread the following recommendations are made for implementation in a medium-term setting:

(i) The maximum tariff on vehicles should be brought down to 35 percent in a five year time frame.

(ii) The dispersion of tariffs among CBUs of vehicles should not exceed 15 percent in the terminal year with lower rates of 20-25 percent on trucks and buses and 35 percent on cars and motorcycles. The same tariff rates should apply on cars of different sizes. However, in order to discourage luxury consumption, excise duty may be applied both on CBU imports and domestic production.

(iii) The rate of excise duty may be levied at 20 percent on cars with capacity of 1300-1500cc, rising to 60 percent for cars above 2000cc.

(iv) The distinction between localized parts and non-localized parts needs to be removed in the tariff schedules, as is the case in most countries. In addition, SRO 656(1)/2006, meant for concessionary imports, must be withdrawn. These provisions have conferred considerable discretionary power to EDB and the Customs Department and led essentially to a reversion back to the licensing regime the duty should be brought down to 20 percent.

While competition is limited in the market for cars and is most intensive in motorcycles, with other sectors falling in between, the CCP needs to be pro-active in ensuring greater competition among car and tractor manufacturers. In addition, there is need to review other policies, laws and regulations.

The automotive sector of Pakistan is still at a relatively early stage of development. Dependence on imports remains high and exports have only commenced in some products with relatively small volumes. If exports are to increase manifold, the AIDP will need to be extended up-to 2021 and implemented much more vigorously.

As far as quality standards are concerned, these should definitely be strengthened, especially in the case of auto parts. The replacement market is already flooded with sub-standard parts, both domestic and imported. These practices need to be curbed through more effective regulation, either by federal or provincial agencies.

There is definitely a strong case for strengthening valuation and anti-dumping mechanisms. The problem of under invoicing of parts, in particular, has acquired serious proportions. This may necessitate a return to the International Trade Price (ITP) system or the use of specific duty on some items, including auto parts and other automotive products.

Regarding the improvement of parts manufacturing. The demand could be met by better availability of resources aiding infrastructure development and thereby capacity development and expansion of existing vendors. This will help Pakistan to emerge as a global manufacturer of auto parts in the international market.

PAGE: Could you tell about the taxes on the automobiles and auto parts?

Anwar Iqbal: Approximately 40 percent of the total price of locally-manufactured cars is made of taxes. The value includes at least seven taxes and levies, namely customs duty, additional customs duty (based on engine size), income tax, general sales tax, federal excise duty, withholding tax and registration tax.

A conventional 660cc carries up to 73 percent of taxes on completely knock-down. Likewise, a new 1,800cc vehicle should be available at Rs2.3 million to the customer if it does not carry taxes of Rs1.6 million. Exorbitant taxes are the real cause behind high prices of cars in Pakistan. At present, 18% sales tax is levied on cars. If the government cuts it down to single digit, it will give a boost to the entire automobile sector and enhance government earnings as well. The automobile sector, which is struggling to restore its activities amid the spread of Covid-19, has requested the government to slash taxes in the Finance Bill 2021.

Import Customs Duty on Auto Parts in Pakistan include:

Car Spare Part Customs Duty 35%

Car Spare Part Sales Tax 17%

Car Spare Part Additional Sales Tax 3%

Car Spare Part Income Tax 6% (Advance

Income Tax SRO Used & 9% will change to 6%)

Car Spare Part Additional Customs Duty 1%

The complex tax structure costs more than 90% on auto-parts. On the other hand importer and manufacture of auto parts who fulfill all legal requirements suffer the most as the authorities have failed to control the flow of smuggled auto-parts in the market.

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