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Auto industry moving ahead to form industrialization in Pakistan

Published on 14th Nov, Edition 46, 2016


Local tractor industry urges govt to clear sales tax refunds of Rs3 billion

For industrialization of any country, automobile sector can play a critical role. Auto sector is a unique industry, which is capital intensive as well as labor intensive in nature and helps to develop technologies in other areas of manufacturing such as steel, plastics, rubber, textiles, electrical & electronics etc.

Due to this reason, in the last 30 years, many countries have used the auto sector as a launching pad for promoting industrialization, economic growth and employment generation. These countries include Japan, China, Korea, India, Brazil, Indonesia, Thailand, Malaysia, etc.

Pakistan is in a unique position to have a full fledged auto industry operating in the country. The latest models of cars assembled in Pakistan (Civic, Corolla, City, Swift, WagonR) use upto 70 percent locally produced parts that meet up to the global quality standards defined by Suzuki, Toyota & Honda and are competitive in price when compared with other countries in the region. Also, the older models Mehran, Ravi and Bolan are low cost options that are good alternatives for motorcycle owners who want to buy their first family car.

Presently, four global companies are producing passenger cars in the country. Out of these, three companies Suzuki, Toyota and Honda are from Japan and belong to the group of top 10 global car makers having worldwide investments in several countries of the world.

Suzuki, Toyota and Honda have invested long term equity to setup massive assembly plants in the country. Almost 100 Japanese nationals are working full time or part time in Pakistan to support the operation of these plants.

Pakistan auto industry employs almost 3 million persons, directly and indirectly. The country, with a population of 200 million, desperately needs avenues to create employment opportunities. The auto industry can help in providing jobs to Pakistani youth, which comprise around 50 percent of the country’s population.

Despite manifold challenges, Pakistan auto sector is moving forward and contributing to the national economy by paying heavy taxes. The local auto industry, if facilitated in real terms can not only create huge employment opportunities but also revive the national economy. Auto industry is doing so well at this time in the country. The auto industry must now focus on enlarging output of its cars and export more units to countries in its neighborhood. It should also tap new markets in Central Asia.

In its latest endeavor, Pak Suzuki Motors has publicized its plans to initiate local production of Suzuki Alto 660cc latest by 2018 in place of its long standing and iconic Mehran 800cc. The company has already started talks with local vendors for the process of localization of car parts of the upcoming 660cc car.

Suzuki will also be replacing Suzuki Cultus with the Suzuki Celerio 1,000cc by March 2017 and based on consumer feedback, the company in all likely hood would be introducing imported Suzuki Grand Vitara SUV and 1,300cc Ciaz Sedan; while considering to assemble them locally.

Pak Suzuki has announced to phase out its iconic Mehran 800cc from 2018 onwards and replace it with locally manufactured 660cc Suzuki Alto, sources in the company said.


Issues of tractor industry

On the other hand, the local tractor industry is facing host of issues.

The prices of the local made tractors are also very competitive making it very difficult for world players in the tractor manufacturing to sell their products in the Pakistani market.

Completely built tractors were allowed into the country at zero rated duty until two years back and only in 2014 a 15 percent duty was levied on CBU tractors. Despite zero custom duty very few tractors were able to sell in the Pakistani market.

According to industry experts, work needs to be done on the demand side of the tractor industry rather than the supply side. They apprehended that MTW will import tractors in SKD form and avail the zero rated duty from the federal government and tractor subsidy from the Sindh government, under the Sindh tractor scheme.

The piling up of sales tax refunds have become a major concern for the industry while it continues to nullify the various supportive initiatives taken by the government to improve the financial health of poor farming community, Mr. Abdul Waheed Director General Pakistan Automotive Manufacturers Association (PAMA) said in an appeal.

He urged the Finance Minister to take notice of the fact that currently, the tractor industry’s old outstanding and genuine refunds are hovering around Rs3 billion resulting in huge operational challenges as the cost of doing business is increasing day by day with increasing refunds.

The appeal said that with the recent reduction in sales tax rate on supply of tractors, tractor manufacturers are charging sales tax at the rate of 5 percent on supply of tractors as against the input tax on purchases of components @ 17%, both at local as well as on imports.

Since input tax is at a much higher rate as against the output tax, refunds are consistently accruing and increasing on a regular basis.

Ultimately the burden of such undue cost will be borne by the end consumer i.e. farmer who is already facing challenges on account of depressed commodities prices and increased input cost. This burden is also nullifying the various supportive initiatives taken by the government to improve the financial health of farmers.

He suggested that in order to minimize the accumulation of refunds, tractor industry is continuously urging the government to reduce the rate of input tax on purchase of imported components by tractor manufacturers to match the reduced rate i.e. 5%.

This will help the industry to reduce yearly refunds by approximately 700 million.

As sales tax on imports is directly collected by the government at the import stage and no other intermediaries are involved, therefore it is advisable for the authorities to implement it and avoid undue hassle of refund processing. However, government is not heeding on the plea of the industry.

Further, the STARR system of FBR is passing through a development phase since July 2016. Accordingly, no refund claims are being accepted manually. The relevant local tax office is not processing refunds due to technical issues and helpless in this regard. This delay is creating a cloud of ambiguities for the tax payers with respect to their huge amount of refunds accumulating on monthly basis, Director General of PAMA mentioned.

He appealed to the Finance Minister to direct the Ministry of Finance for release of accumulated refunds of tractor industry on urgent and priority basis to avoid financial collapse. Further, FBR should move on swiftly for completion of up-gradation exercise otherwise manual practice of accepting refunds should be continued till the successful launch of auto refund plan. These remedial steps are imminent at this stage to maintain the confidence level of foreign investors on our regulatory bodies and business environment.


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