Government’s drive to provide cheap cars to the
public would take a hit if the Finance (Supplementary) Bill 2021 gets the
approval of the upper house to slap federal excise duty(FED) of 2.5 percent on
cars below 1000cc as well as a sales tax of 17 percent on 1000cc cars.

“It has been done to meet IMF (International
Monetary Fund) conditions,” said Engineering Development Board Chairman Almas
Hyder. “But the philosophy is still there. Taxes have gone up for small engine
cars at lower than it has been increased for bigger engine cars.”

Hyder said that despite taxes going up and subsequent prices, the
sales volume of car makers would cross 300,000 cars as manufacturers already
have a big number of orders.

“The cars below 1000cc will see their price going up again,” said
JS Research’s research analyst Wasil Zaman. “It may look like as if cars below
850cc will only see FED going up and not sales tax, but one must remember that
the segment is highly price sensitive. I think Suzuki Alto’s high sales will
see its momentum losing steam soon,” he added.

The 660cc Alto is the only locally manufactured car that falls
under the below 850cc slab. More than 9,000 units of Alto were sold in December

Previously, there was zero FED on cars up to 1000cc, while the
government had imposed 2.5 percent FED on 1000cc-2000cc cars, and 5 percent FED
on cars above 2000cc. But in the new bill, the government has introduced a new
slab of up to 1300cc cars, on which a FED of 2.5 percent would be implemented,
while on cars with engine capacity between 1300cc and 2000cc, the FED would be
5 percent, and above 2000cc cars, it would be 10 percent.

According to Zaman, if the bill was passed in the Senate, it would
impact the prices of Suzuki Alto, Kia Picanto, Suzuki Cultus and Wagon-R by
Rs26,000 to Rs57,000.

Meanwhile, cars that previously fell under 1000cc, will also see
their sales tax going up from 12.5 percent to 17 percent. It is expected to
jack up car prices between Rs70,000 and Rs100,000.

Zaman said that the companies might also pass on increasing raw
material cost when they announce new prices.

“The smaller cars will actually get affected,” said auto industry
expert Mashood Khan. “A person buying a car worth Rs5 million won’t find it
difficult to pay few lacs more.”

Khan added that with interest rates also going up, he sees demand
for cars to slow down. He said roughly 40 percent of the car sales happened
through car financing.

The former Pakistan Association of Automotive Parts and
Accessories (PAAPAM) chairman said that the impact would be observed in the second
quarter of the calendar year 2022. It was because buyers would be receiving
deliveries of cars they have already booked in the first quarter.

Last year in the budget, the government reduced taxes and duties
especially on small-engine ‘common man’ cars.

The reduction in taxes and duties saw car prices going down
between Rs60,000 to up to Rs400,000 in one case.

The government reduced FED on all vehicles even above 1000cc by
2.5 percent. Sales tax was reduced on vehicles below 1000cc from 17 percent to
12.5 percent.

Meanwhile, 7 percent additional custom duty (ACD) was removed on
cars below 1000cc and reduced on cars above 1000cc to 2 percent. There is a
lack of clarity on ACD at the moment.

The government, initially, had taken the step to reduce the prices
of cars in the entry-level segment, considered to entertain the middle and
lower-income groups. But the government went on to extend the duties’
incentives on high-end cars too. This was done to incentivise car makers and
parts industry to go for localisation.

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