Automakers want tax breaks for cars with displacements of 1400cc and higher

The government’s proposal to raise sales tax on larger vehicles (1400cc and above) has been criticized by Pakistani automakers, who say it will negatively impact their already struggling industry. This was published by The News on Saturday.

The hike in sales tax to 25% from 17% was agreed earlier this week by the Economic Coordination Committee (ECC) as a revenue-raising strategy to achieve the fiscal targets established by the International Monetary Fund (IMF).

The Pakistan Automotive Manufacturers Association (PAMA) criticized the decision, claiming it was unjust and ineffective because it would only impact indigenous automakers and ignore used car imports, who already have a sizable market share and benefit from cheaper taxes.

The association’s director general, Abdul Waheed Khan, wrote a letter to Finance Minister Dr. Shamshad Akhtar stating that the tax increase will further decrease the demand for locally built cars, which have already experienced a steep reduction in production and sales because of poor demand and inflation.

He remarked, “It’s like killing someone.”

A five-year comparative chart of the nation’s car production and sales, which demonstrated a persistent fall in both, was sent with the letter.

In his letter, he claimed that since cars are demand-elastic goods, their sales would decrease further if their prices increased. For this reason, raising the sales tax would be counterproductive.

There is a rationale for negative protection for locally created automobiles because taxes on cars manufactured locally have gone up while taxes on used cars imported have stayed the same. As a result, the market left empty by domestically made automobiles has been filled by used cars. Used automobiles accounted for 10% of the market previously, but that number has since increased to 30%.

“As a result, the government loses out on foreign exchange and lawful revenue. The director general said, “We are extremely shocked to learn that this measure will additionally generate revenue of Rs4 billion, which is highly unlikely.”

We fear that the action will ultimately lead to a decline in volumes and a corresponding decline in revenues. The proposed action would only worsen consumer sentiment, undermine investor confidence in Pakistan, and harm the country’s economy.

The PAMA asked the minister to refrain from putting additional strain on the regional economy by raising the sales tax rate to 25%. Khan continued, “This rate increase proposal was previously rejected when it was discussed with industry representatives, OEMs, and vendors.”