Tax issues holding up new Automotive Development Policy 2015-20

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Tax authorities have held up implementation of the Automotive Development Policy 2015-20 for the last six months over flimsy grounds.

The policy, if implemented, could significantly increase manufacturing of the much needed trucks, buses and tractors along with the cars in the country.

An official source said that the Federal Board of Revenue (FBR) is strongly opposed to giving the same tax incentives to the incumbent players as are being offered to the new greenfield investors. The existing car manufacturers are lobbying hard for similar tax relief for manufacturing new models in the country.

“The policy is ready but the government is not ready to implement it,” the source said, and added that the policy was to be implemented from the start of the current fiscal year but opposition of the tax authorities derailed the process. Government is under too much pressure from the auto giants as well as from their home countries to provide level playing field for all.

The policy has lowered the entry threshold for new investment, provided an enabling tariff structure for development of the automotive sector, auto import policy has been rationalised and for the first time regulatory and enforcement mechanisms for quality, safety and environmental standards are provided.

“An investor under Automotive Development Policy (2015-2020), establishing maiden assembly facility will invariably need separate treatment and greater incentives in the early years to enable it to introduce its brand, develop a market niche and share, create a distribution and after-sales service networks and develop a parts manufacturer base” the draft of the policy says.

The policy envisages three categories of new investment with different incentives: The Category-A Investment is called Greenfield Investment and is defined as the construction of new and independent automotive assembly and manufacturing facilities by an investor for the production of vehicles of make not already being assembled in Pakistan.

The Category-B investment is declared Brownfield Investment and is defined as the revival of existing non-operational or closed assembly and manufacturing facilities since June 30, 2013 either independently by original owners or new investors or under joint venture agreement with foreign principal or by foreign principal independently through purchase of plant.

The Category-C investment is the Greenfield investment by the auto parts makers. The policy extends the scope of new investment to auto parts makers in order to attract global Tier I and Tier II auto parts manufacturers to make investment in Pakistan, either independently or in joint venture with Pakistani auto parts makers. Scope shall also be extended to local APMs investing in a new plant to produce critical components of engine, transmission and suspension not produced before for any APM/OEM in Pakistan

Special incentives for Category-A investors include: completely knocked down (CKD) operations, import of non-localized parts at 10 per cent rate of customs duty and localized parts at 25 per cent duty for a period of 4 years in respect of passenger cars and LCVs from 800 cc and above category, import of 100 per cent parts at 10 per cent customs duty for a period of 3 years in respect of passenger cars below 800 cc category, import of 100 per cent parts at prevailing customs duty applicable to non-localized parts for a period of 3 years in respect of buses, trucks, tractors and prime movers.

For motorcycle industry, existing policy as approved by the ECC and notified by FBR will continue.

The incentives include: medium knocked Down (MKD) operations, import of 100 per cent MKD parts at 25 per cent rate of customs duty for a period of four years in respect of passenger cars after which CKD tariff regime shall apply.

All incentives, facilities and tax exemptions available under Special Economic Zone Act shall be available to all Category-A investors, including 100 per cent exemption from custom duties and taxes on the import of plant, machinery, equipment and tooling such as dies, molds, jigs and fixtures for production, inspection and testing of vehicles on one time basis. An investor will be allowed to import 100 vehicles of same variant in CBU form at 25 per cent of the prevailing duty for test marketing after ground-breaking.

Category-B investor will be entitled to the following incentives: import of non-localized parts at 10 per cent rate of customs duty and localized parts at 25 per cent duty for a period of three years in respect of passenger cars and LCVs from 800cc and above category, import of 100 per cent parts at 10 per cent custom duty for a period of two years in respect of passenger cars and LCVs from below 800 cc category.

Other incentives include import of 100 per cent parts at prevailing customs duty applicable to non-localized parts for a period of two years in respect of buses, trucks, tractors and prime movers, 100 per cent exemption from customs duties on import of tooling such as dies, molds, jigs and fixtures for production, inspection and testing of vehicles.

A Category C investor shall be entitled to all incentives under SEZ Act. The Category- C incentives include the following:

The eligibility criteria for an investor would be to submit a detailed business plan and relevant documents for manufacturing of vehicles to Engineering Development Board (EDB) for assessment. The EDB will verify the investor’s in-house assembly/manufacturing facilities for the manufacture of road worthy vehicles. The Board will determine eligibility of the applicant under the defined criteria to be declared as an Investor in any of the three categories.

Ministry of Industries and Production, on the recommendation of EDB, will approve the investor under the relevant category. AIDC and EDB will review results of the Investment Policy once every two years and will recommend modifications, if any.

In case of material deviation from the approved commercial operation schedule, withdrawal of incentives shall take effect. EDB will initiate suitable action after necessary verification that may lead to the stoppage or withdrawal of benefits allowed. Details and mechanism for this will be covered in the investment agreement to be signed between the government and the investor.