Pakistan’s new auto policy expects cheaper cars, increased production

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 and incentivise auto exports.

According to multiple industry sources, roughly 45 per cent 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), the auto parts used in assembling cars.

The Customs duty on import of localised parts is 45 per cent. The duty on non-localised parts is 30 per cent. There is an additional 7 per cent duty on the import of parts. Federal Excise Duty on cars: 2.5 per cent on cars up to 1000cc; 5 per cent on cars between 1000cc and 2000cc; 7.5 per cent on vehicles above 2000cc; and Along with this, there is a 17 per cent sales tax.

Engineering Development Board General Manager Asim Ayaz said that the small (entry-level) cars have been neglected in the past. The new policy will focus on the manufacturing of entry-level cars, a private television channel reported.

The government can influence the prices of cars by reducing taxes and duties. 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, Ayaz said.

He said that 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, may lead to an increase in localisation and efforts to increase exports.

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 per cent, and 10 per cent on non-localised parts for new companies with Greenfield status. Explained why cars were cheaper in India, Ayaz said that India has a huge demand for small cars that makes local production of car parts cheaper due to economies of scale.

Taxes and duties in India are also lower than in Pakistan. The taxes and duties in Pakistan are almost 40 per cent of the total price of a car. But in India, taxes are below 20 per cent (it varies from state to state).

The government’s current Auto Development Policy has given a push to healthy competition. Several car companies such as Kia, Hyundai, and Changan have entered the Pakistan market. There are now two direct competitors to Suzuki Alto, the most selling car in Pakistan: United Bravo and DFSK’s Prince Pearl. Moreover, United Motors has also introduced Chery QQ with the name Alpha at a similar price range.

He said that he said that when demand exceeds 500,000 cars, the industry becomes feasible. The industry has a capacity of 418,500 cars and a demand of around 250,000 to 300,000. The industry is recovering and production may reach 200,000 to 225,000 cars during the ongoing fiscal year.

Mobile phone companies were also entering Pakistan and cell phone giant Samsung can also be expected to come to Pakistan, he added.

If things go as expected then Pakistan will be able to achieve around 80 per cent localisation of mobile phones in the country, which means that 80 per cent of the mobile phones sold in Pakistan will be locally made.

He said that the new car companies would generate employment of around 40,000 to 50,000 people, while mobile companies are expected to generate employment of around 20,000 to 25,000. Pakistan’s exports to China shot up by 64 per cent during January-March 2021, Commercial Consular, Pakistan Embassy, Beijing, Badar Uz Zaman said.

He made these remarks while participating in a recently held a brainstorming session online with representatives of Pakistani trading community to discuss how to secure a due share in the over $2 trillion import market of China. The conference had particular significance in the backdrop of the updated China-Pakistan FTA.

They stressed the need to robust efforts to take full benefits of the concessions granted by the Iron Brother to Pakistani traders under the CPFTA-II. However, the government officials told the traders that value-addition, certification and branding were all a must for penetrating the Chinese market, according to a report published by CEN.