Auto Sector: Tax reliefs extended up to 1000cc passenger cars

June 29, 2021 (MLN):  The finance minister has recently announced that the tax incentives will cover all passenger cars up to 1000cc engine displacement.

To note, the Financial Bill 2021-22 included a series of incentives for the Auto industry, most notable being the abolishment of FED (2.5%) on passenger cars of up to 850cc and value-added tax, while also reducing GST to 12.5% from the standard 17%.

While Budget was on the corner, the government showed interest in providing benefits to the industry to make cars more economical for the locals. With a substantial increase in price since 2018 (about 50%), small cars became unaffordable for the masses. Considering the last decade, the fall in car prices is big news for the country as this had never happened before in the ten-year timeline.

An important aspect to cover would be the aftereffect of this decision as it will benefit masses in various ways, reducing the prices of cars which are highly preferred in the country including Cultus, Wagon R, Alto, and Bolan of Pak Suzuki (PSMC), Kia Picanto of Lucky Motor Corp (through LUCK), Prince Pearl and United Bravo/Alpha – by PKR100,000-150,000, a report by Intermarket Securities (IMS) highlighted.

Furthermore, these measures taken in the bill have positive impacts on the PSMC, the largest producer of Economy segment cars in Pakistan, and LUCK (Kia Picanto). But regard to all these advantages, it is important to remember that the pass-on of the tax benefits will have no direct impact on profit margins, although the OEMs are likely to benefit through an increase in demand in view of IMS.

Going by the report, the increased restrictions on used CBU imports combined with high custom duties and PKR depreciation, led to a surge in used CBU prices of cars up to 1,000cc cars.

“There is a strong possibility that PSMC will directly benefit through greater volumetric sales following the price cuts (widening of local-imported price gap). This is better explained when you take an example of a 660cc car imported with respect to a car assembled in Pakistan. An imported 660cc car would start from PKR1.7mn, while a locally assembled Alto starts from PKR1.2mn (excluding tax incentives),” Abdul Ghani Mianoor, Analyst at IMS said.

It is expected that the Auto industry will sustain the recent momentum for the coming FY22-23f, amid expected macroeconomic improvement and single-digit interest rates.

Government is under talks for the formulation of a new Auto policy. As per the IMS report, incentives may also be extended to include cars above 1,000cc. However, a key risk for local industry revolves around the proposals on the reduction of CD on imported CBUs.

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