Duty-free import of new plants and reduction in duty on parts provisioned for new entrants for five years
The government announced on Monday that foreign carmakers seeking to enter the market could import machinery for their plants duty-free, in an attempt to boost competition and cut prices for local drivers.
The market has for decades been dominated by Japan’s Suzuki, Toyota and Honda who have been accused of colluding to fix prices for lower-quality versions of their models.
“We have introduced this new auto policy and our objective is to address the needs of consumers and the market,” Defence Minister Khawaja Muhammad Asif, who is also the head of a committee on auto policy, told a press conference.
Asif said that despite a captive market, car assemblers in Pakistan failed to introduce basic features available to consumers in international markets such as airbags, anti-lock braking and emission control systems.
“There is no value for money a Pakistani car buyer gets, even after paying Rs 2.6 million ($26,000) for an 1,800cc car,” Asif said.
Board of Investment Chairman Miftah Ismail said the government hopes to attract two or three new players to the market.
Apart from the duty-free concessions for the plant, the import duty on car parts for new entrants would be set at 10 per cent for those items which cannot be manufactured locally and 25 per cent for others.
The incentives would remain in place for five years, Ismail said.
Demand for cars in Pakistan is accelerating as economic growth has reached its fastest pace since 2008. Renewed investor confidence and easing inflation have spurred consumer spending.
Last year a delegation from Volkswagen visited the country but the German auto giant has not yet announced plans to build a local factory.
“After the announcement of this auto policy, any new entrants will take at least three years to enter the local auto market,” one local expert said. The new policy aims to facilitate higher volumes, more investment, enhanced competition and better quality with latest technology.
The government has also allowed one-off duty-free import of plant and machinery in order to facilitate the setting up of a new manufacturing operation.
Ghandhara Nissan (GHNL) and Dewan Farooq Motors (DFML) may be the prime beneficiaries in this category as both companies were thinking to upgrade their car plants in Pakistan. Nissan was manufacturing 1300cc car (Sunny Nissan), but the plant has been closed for a few years. Similarly, Dewan Farooq shut down their Santro assembling plant around five years ago.
All Pakistan Motor Dealers Association (APMDA) Chairman H M Shahzad told Pakistan Today, “Our demand was to allow commercial import of used cars, which will be a win-win arrangements for the government as well as car owners who want to buy affordable cars that provide high quality and safety.”
He said they had been told the issue would be considered in the Auto Policy. However, now, they’re being told that this does not come in the ambit of the Auto Policy and will come through the parliament, in other words, in the budget.
He said that 80 per cent of all used car imports are of 660cc which are not assembled in the country. These cars give a mileage of almost 23 km per liter and so, there is no need for CNG for this car.
A substantial duty reduction has once again been approved for the local assemblers without any condition of consequent price reduction. The local assemblers have, in fact, increased their prices recently, he added.
An analyst said regarding the new auto policy, “The policy is neutral to positive for existing Original Equipment Manufacturers (OEMs) as customs duty on completely knocked down (CKD) units has been reduced from 32.5 per cent to 30 per cent, which will improve margins for existing players. Similarly, reduction has been made in import duty rates on localised and non-localised parts to improve indigenous competitiveness while the age limit of used imported passenger cars has been maintained at three years. On import of buses, vans, trucks, pickups and SUVs including 4×4 vehicles, the age limit has been set at five years.”
Auto policy 2015-20 lowers entry barriers for new entrants and incentivizes the existing non-operational/closed assembly and manufacturing facilities, which have not been in operation since June 30, 2013.
The previous Auto Policy expired in 2012 but the government did not issue a new policy after it expired. This created uncertainty while the auto sector suffered from lack of new investment.
Investors will be entitled to import duty on non-localised parts at 10 per cent and for localised parts at 25 per cent for a period of four years for passenger cars of 800cc and above. Further, 100 per cent parts for cars below 800cc can be imported at 10 per cent customs duty.
Category B deals with revival of existing non-operational or closed assembly and manufacturing facilities that have remained closed since June 30, 2013. The new auto policy offers 10 per cent rate of customs duty for non-localised parts and 25 per cent for localised parts for a period of three years.
Import policy for used vehicles allows expatriate Pakistanis to bring passenger cars up to three years old under 1) Personal baggage once every two years per family, 2) Transfer of residence and 3) Gift scheme once in two years.
Increase in age limit was a major risk for local OEMs as the government had increased the age limit of used imported cars from three to five years in February 2011, which resulted in an influx of 50,000-60,000 imported used cars within 12-18 months.
Other provisions in the auto policy include facilitating individual buyers of the HCV segment by extending consumer finance facility to individual customers for commercial vehicles in line with the car segment financing scheme at the prevailing interest rates as well as enforcement of safety features and standards, where anti-locking braking system (ABS) is to be enforced even for 800cc vehicles as part of minimum safety standards. The auto policy also calls for limiting the amount of advance payment to 50 per cent of the total price while delivery time has been set at two-months (any delay will result in discount KIBOR + 2 per cent prevailing on the date of final delivery/settlement from the final payment). The 50 per cent regulatory duty on imported vehicles above 1801cc has also been removed.