LAHORE – Through the proposed ‘New Entrant Policy’, the government has planned to end the stranglehold that existing players enjoy in the automobile and auto-vending industry. Earlier, the government relaxed conditions on the imports of second hand cars, now it has proposed tax discounts for new entrants, which would ultimately eliminate the local manufacturing.
Official documents made available to Pakistan Today suggests that the proposed policy under the Auto Industry Development Policy (AIDP) would allow new entrants to import 100 percent complete knock down (CKD) kits at discounted tax rates for three years. In a recent Inter-Ministerial Committee meeting, documents indicate, Ministry of Industry and Production (MoIP) has proposed reduction in duty of CKD kits whether or not manufactured locally.
The MoIP suggested that a new entrant would enjoy a special ad value rate – inclusive of all import taxes i.e. Customs Duty, Sales Tax, Excise Duty, Special Excise Duty, Income Tax – of five percent in the first year, 10 percent in second year, 20 percent in third year and the prevailing duty rate thereafter. However, the Ministry of Commerce (MoC) has presented a different formula for new entrants.
Documentary evidence reveals that the MoC has proposed that new entrants should be allowed to import 100 percent CKD (whether manufactured locally or not) at the reduced rate equivalent to 50 percent of the existing rate, which means the policy will allow to import 100 percent CKD at 15 percent ad value for a period of next five years. Both ministries have proposed that the new entrants have to achieve minimum indigenisation within five years.
Proposed new entrant policy documents suggest that in case of cars, potential new players will have 100,000 units of annual production in countries other than Pakistan. However, previously it was approved by the Economic Coordination Committee of the Cabinet in June 2010 that the new entrant will have significant global presence by way of manufacturing 500,000 units of cars, at least 25,000 units of truck and buses separately, 40,000 light commercial vehicles (LCV) and at least 50,000 units in case of agricultural tractors annually in countries other than Pakistan.
Auto manufacturers and vendors say that the MoIP has backtracked from the ECC’s earlier decision, which is illegitimate and a deviance from the AIDP. According to rules, no amendment could be made in the AIDP without consultation of the Auto Industry Development Committee which comprises of representatives of the Engineering Development Board (EDB), Federal Board of Revenue (FBR), Ministry of Science and Technology, auto assemblers and auto vendors.
Auto manufacturers agree that there was no doubt that the new entrants will increase competition and market base. But they were of the view that the MoIP and EDB should provide level playing field to all investors. They point out that any preferential treatment to the new entrants could not genuinely increase the investment base in Pakistan. A manufacturer producing Japanese cars stressed that a long term consistent policy is the only way to encourage investments in the country.
Preferential treatment will encourage the existing Chinese players to take a similar and push for similar preferential treatment for another ‘future new entrant’. Industry experts indicate that any distortion in the tax structure will undermine the principles of the free market and is against the spirit of competition laws. They point out that unrestricted import of 100 percent CKD kits will result in the closure of vending industry and the proposed new entrant policy will widely reduce the tax revenues.
