KARACHI: With no clarity whether decisions taken while making the mini-budget would end after the announcement of Federal Budget 2022-23 or stay in place till December 2022, auto sector stakeholders said an increase in taxes and duties on locally-assembled and imported vehicles will definitely bring booming auto sales under pressure.

The government has increased the federal excise duty (FED) on locally-made vehicles of 1,000-2,000cc to five per cent from 2.5pc, followed by a hike to 10pc from 5pc on more than 2,000cc. FED on locally-made double cabins vehicles had been raised from 7.5pc to 10pc. General sales tax (GST) on automobiles for engine capacity between 850cc and 1,000cc had been enhanced to 17pc from 12.5pc. FED on import vehicles of 1,000-1,799cc has been increased to 30pc from 25pc followed by a jump to 40pc from 30pc in more than 3,000cc.

Indus Motor Company (IMC) CEO Ali Asghar Jamali said that it was unclear whether the duration of the measures taken in the mini budget would last till the announcement of Budget FY23 or these would continue post-budget.

“I anticipate a drop of 10-15pc in the sales of locally-assembled vehicles in case tax changes are made till the new budget announcement,” he said.

Cloud of uncertainty over duration of changes

Mr Jamali projected a fall of 20-25pc in case the tax changes would remain applicable after Budget FY23.

“The most important point is the confidence of investors in future in the light of decision taken in the mini budget for the auto sector,” he said.

IMC had announced millions of dollar investment besides investing in local production of hybrid vehicles but everything has changed within 100 days, he added.

Head of Research Pak Kuwait Investment Company Samiullah Tariq opined that automobiles would certainly become costlier. However, vehicles sales may not be hit hard as consumers had already been facing three to seven months times in getting delivery of locally-assembled cars, SUVs and Jeeps which had been earlier, he added.

He said steps taken in the mini budget appear in line with the State Bank of Pakistan’s (SBP) decision to compress the sales of automobiles through auto financing by the banks.

Head of Research Ismail Iqbal Securities Fahad Rauf said sales would definitely drop but the second quarter of 2022 would give the real picture of impact of both the mini budget and the SBP’s decision to control auto financing.

He said currently auto sales had not shown any big upset in the last five months despite increase in the prices of vehicles.

In the last week of September, the SBP had slashed the maximum tenure of auto financing from seven years to five years besides increasing down payment for auto financing to 30pc from 15pc and reduction in maximum tenure for a personal loan from five years to four years.

Maximum debt-burden ratio allowed to a borrower had been decreased from 50pc to 40pc while the overall auto financing limits availed by one person from all banks/DFIs, in aggregate, would not exceed Rs3m, at any point in time. SBP’s prudential regulation for consumer financing is not applicable on locally-manufactured cars below 1,000cc and locally-manufactured electric vehicles.

An analyst at Insight Research said that Indus Motor Company (IMC) and Honda Atlas Cars Limited (HACL) would be most impacted by the proposed increased in duties, since all their cars are above 1,000cc.

Furthermore, increase in FED and GST would result in higher vehicle prices thus affecting volumetric sales. He said Toyota Hilux and Fortuner may see the highest price increase as FED on cars above 2,000cc increased twofold. On the flipside, he added this proposal has no material impact on Pak Suzuki Motor Company Limited (PSMCL) as most of its vehicles are under 1,000cc, where no FED is levied.

The government had reduced FED across the board on locally-manufactured vehicles in June.

However, the government has now increased the FED on different engine capacities to ease pressure on import bill, he said.

Published in Dawn, December 31st, 2021