Car makers urge govt to scrap tax hike on larger vehicles

KARACHI: Car manufacturers have urged the government to reverse a decision to raise the sales tax on locally produced vehicles of 1400cc and above, saying it would hurt the already struggling industry.

The Economic Coordination Committee of the Cabinet approved the tax increase to 25 percent from 17 percent on Wednesday, as part of a revenue-raising measure to meet the fiscal targets set by the International Monetary Fund.

But the Pakistan Automotive Manufacturers Association (PAMA) said the move was unfair and counterproductive, as it would only affect the domestic car makers and not the importers of used cars, who enjoy lower taxes and have captured a large share of the market. In a letter to the finance minister, Dr. Shamshad Akhtar, the association's director general, Abdul Waheed Khan, said the tax hike would further reduce the demand for locally made cars, which have already seen a sharp decline in production and sales due to inflation and low demand.

“It is like “killing someone dead,” he said. The letter enclosed a five-year comparative chart of production and sales of automobiles produced in the country that showed a continued decline in production and sales. “The automobiles are demand elastic items whose sales would further go down with an increase in the prices; hence the increase in the sales tax would be counterproductive,” the letter said.

The taxes on locally produced cars have further increased while the taxes on the import of used cars have remained unchanged, thus making a case of negative protection to locally made cars. Thus, the used cars have managed to fill the market vacated by locally produced cars. Previously, the market share of used cars was around 10 percent, which has gone up now to 30 percent. “This causes loss of foreign exchange and loss of legitimate revenue to the government,” he said.

“We are very surprised to note that this measure will additionally generate revenue of PKR 4 billion, which is highly unlikely,” the letter said. “We are apprehensive that the measure would eventually result in a drop in the volumes with a consequent drop in the revenues.” The measure in question would only be hurting the economy, enhancing negative sentiments for consumers and losing investor confidence in investment in Pakistan.” The PAMA requested the minister not to further burden the local industry with an increase in the rate of sales tax to 25 percent. “This proposal to increase the rate was earlier turned down when it was discussed with industry representatives; OEMs and vendors,” Khan added.