Pakistani Auto Manufacturers Challenge Sales Tax Hike on Larger Vehicles

Pakistan’s automobile manufacturers have urged the government to reconsider its recent increase in sales tax on larger vehicles with engine capacities of 1400cc and above, as the auto industry is already struggling.

The Economic Coordination Committee (ECC) ratified an increase in the sales tax from 17% to 25%, aiming to bolster revenue in alignment with fiscal benchmarks established by the International Monetary Fund (IMF).

In response, the Pakistan Automotive Manufacturers Association (PAMA) criticized the decision as inequitable and detrimental, pointing out that it disproportionately impacts domestic car producers while sparing importers of used vehicles, who benefit from lower tax rates and command a significant market share.

In correspondence with Finance Minister Dr Shamshad Akhtar, PAMA’s Director General, Abdul Waheed Khan, expressed that the heightened tax would further dampen the demand for locally manufactured vehicles, which have already witnessed a notable decrease in production and sales due to inflation and diminished consumer interest.

Khan metaphorically described the tax increase as exacerbating an already dire situation, with enclosed data illustrating a persistent downturn in the production and sales of domestic automobiles over the past five years.

He argued that automobiles are highly sensitive to price changes, predicting that the tax hike would reduce sales, thus proving counterproductive. Khan highlighted the discrepancy in taxation between locally produced and imported used cars, noting that the latter’s market share has escalated from 10% to 30%, displacing local vehicles and resulting in foreign exchange losses and diminished government revenue.

Expressing scepticism about the projected additional revenue of Rs4 billion from this tax increase, Khan cautioned that it might lead to decreased volumes and, consequently, lower revenues. He warned that such measures could harm the economy, dampen consumer confidence, and erode investor trust in Pakistan’s investment climate.

PAMA has implored the minister to spare the local industry from the additional burden of the sales tax increase to 25%, mentioning that a similar proposal had previously been rejected after discussions with industry stakeholders, including original equipment manufacturers (OEMs) and vendors.