June 15, 2022 (MLN): Pakistan’s auto sector is one of the major causes of higher imports which creates current account deficit (CAD).
To knock down country’s CAD, the government embattled the auto sector’s proliferating demand by raising taxes for the sector in FY23 budget.
To recall, in the current budget, government has increased advance tax on purchase, registration and transfer of vehicles having capacities of 1000cc to 1600 cc, whereas rate of collection on purchase or transfer of vehicles for non-filers has been increased by 200% from 100% earlier. In addition, government exempted import of electric vehicles in CBU condition from sales tax, and imposed Capital value tax (CVT) at 2% of the value on consumers owning vehicles worth Rs5mn and above.
Even before the budget, government took various measures to curb sector’s demand such as reducing financing tenors, a complete ban on CBU units, and hike in interest rates which made auto financing expensive.
These measures will negatively impact vehicle demand in general. Particularly, the proposal for increasing advance tax for 1600cc is likely to hit demand for Indus Motors Company (INDU) as three of the company’s vehicles lay above 1600 cc that are Corolla Grande, Toyota Revo, and Fortuner, a report by Pearl Securities highlighted.
As per the report, the advance tax for non-filler Corolla Grande will rise to Rs300,000, Revo to Rs600,000 and Fortuner Rs800,000. The said measures will surge the price of the vehicles making them further out of reach for the potential customers as INDU’s 50% customer base belongs to rural areas, where the generally non-filer population is in majority.
However, with tax exemption measures on agriculture equipment, farmer incomes might increase, offsetting the tax impact for the company. Moreover, 2% CVT on vehicles worth Rs5mn will also impact most Indus vehicles. The tax exemption on CBU electric vehicles is neutral for the company as its locally assembled HEV Corolla cross is set to hit the markets at the end of FY23, the report added.
Honda Cars (HCAR) on the other hand likely to be partially impacted by the budget proposals of Capital Value Tax (CVT) on vehicles with prices over Rs5mn as HCAR’s flagship product Civic is likely to see a price increase with the 2% CVT.
The company has plenty of orders for FY23 as it's given a 12-month delivery time after booking, the report noted.
Unlike INDU and HCAR, PSMC is a key beneficiary of the proposed auto tax measures. All of its products are below the engine and value thresholds set for the new taxes. However, unlike other OEMs, PSMC’s customer base is price elastic, being in middle-class and rural areas, hence, another tax-related price increase would dent the demand.
Furthermore, another positive angle for PSMC might come in the shape of a likely boost in agricultural income on the back of incentives provided for tractors and agricultural machinery.
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