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New auto policy to bring huge investment in Pakistan

Published on 28th Mar, Edition 13, 2016

 

Finance Minister Muhammad Ishaq Dar has done well in bringing about a consensus prior to presentation and approval of Automotive Industry Development Policy (AIDP) for the next five years.

The future will determine whether the new policy will help attract new investment to the automobile and auto-parts industry as the auto assembly is said to be the backbone of engineering industry in a country.

The existing auto assemblers want a level playing field; and certainty their existing as well as new investments will be remunerative for them, i.e., the pay back on any new investment made.

The policy objective of new AIDP (2015-2020) is meant to facilitate higher volumes, more investment, enhance competition and better quality and strike a delicate balance between industrial growth and tariffs to ensure sustainability of all stake-holders while protecting consumers’ interests.

New investors will be keen to invest if existing investors are not happy; they must not be allowed to turn hostile in order to protect and preserve foreign investment prospects.

The Economic Coordination Committee (ECC) finally approved an auto policy that could stimulate a round of new investments in this essential sector which has witnessed a large growth in the past year.

The new auto policy will keep prices competitive, maintain output to keep pace with demand, and introduce new models on a regular basis.

The government has done the right thing to emphasize on new entrants in the market above anything else. The policy pursued by previous government since the expiration of the last auto policy in 2012 to promote competition by encouraging imports of used cars was ineffective.

Interest of European makers

In order to attract European carmakers, the government approved a new automobile policy. This policy offers tax incentives to new entrants to help them establish manufacturing units and compete aggressively with the three well-rooted assemblers.

It is anticipated that existing car assemblers may not get similar tax advantages that the government wants to offer to new investors for attracting European brand after tax authorities have again opposed the move due to poor performance.

The purpose of introducing a European brand in Pakistan will be achieved. The government desires that Fiat, Volkswagen or Audi should establish its footprints in Pakistan, as the country has a huge market but the consumers are served only by the present players for almost three decades.

Without getting preferential treatment, no new foreign manufacturer can establish its plant in Pakistan due to a strong network of the existing assemblers.

 

After a lapse of almost two and a half years, the Economic Coordination Committee of the cabinet gave the final approval to the Automotive Development Policy 2016-21.

The government did not revise its policy for used car imports, but left consumers with a limited range of option pending new brands of better quality are produced in the domestic market.

The Federal Board of Revenue had proposed that import of up to five-year-old used cars should be allowed compared to the current three-year ceiling. It also called for opening imports for commercial purposes.

The used car import will not be entitled to the advantages that are being offered to the new investors. The policy was focused at increasing consumer welfare and encouraging competition besides attracting new players.

Greater localization of auto parts had been ensured in the policy and in case the new entrants were not able to achieve the targets, they would be barred. The government sincerely desires that Fiat, Audi or Volkswagen should establish its plant in the country.

The present carmakers not likely to win tax benefits. The concept of new investor has again been changed to deny certain benefits to the existing auto players.

It has permitted import of 100 vehicles of the same variants in the form of completely built units (CBUs) at 50 percent of the prevailing duty for test marketing after the groundbreaking of the project.

Major incentive

A major incentive for the new investors is the reduced 10 percent customs duty on non-localized parts for five years against the prevailing 32.5 percent.

For existing investors, the duty will be slashed by 2.5 percent to 30 percent from the new fiscal year 2016-17. Localized parts can be imported by the new entrants at 25 percent duty compared to the current 50 percent for five years.

For present players, the duty on import of localized parts will be brought down to 45 percent from the new fiscal year, beginning July.

In the CBU category, customs duty on cars up to 1,800cc engine capacity has been reduced by 10 percent for two years – 2017-18 and 2018-19. This will be applicable to the existing players as well and will encourage reduction in car prices. A single duty rate will be applied to the localized and non-localized parts after five years of the new policy.

The present duty structure will continue for seven years for the new investors. The non-localized parts can be imported at 10 percent and localized parts at 25 percent duty for three years for the revival of a sick unit.

The summary of automobile policy revealed that the government had again offered similar tax incentives to the existing assemblers in a distorted manner and plan to bring a European car manufacturer for breaking the monopoly of existing car assemblers.

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