Social media and news channels are abuzz with a new ‘tax’ Federal Bureau of Revenue (FBR) have imposed on used cars. This new SRO’s primary concern is a 17% tax on transactions for registered (filer) individuals and 3% extra for non-registered (non-filers).
It is pertinent to mention here that this new SRO is not for the common masses, rather for car traders, dealers, and businessmen. Hence, it will not impact sale/purchase of vehicles on personal level.
The media has reported it as a new tax, and there is an ongoing reporting on the news channels. Meanwhile, FBR has issued a clarification over the issue. In a series of tweets, the government body said that existing law charged sales tax on full sale value, which was harsh and excessive.
Federal Board of Revenue (FBR) has issued clarification on the news appearing in print and electronic media regarding levying of 17 percent Sales tax on resale of used and refurbished vehicles.1/5
— FBR (@FBRSpokesperson) October 3, 2020
It said the bureau has introduced a new clause of Finance Act to provide relief and encourage refurbishing of second-hand vehicles. “The institute took the step on request of the business community,” FBR said.
Let’s Talk About the Ambiguities:
First, the FBR said that the existing law was harsh and excessive, but there is no sales tax law on the used cars’ trade. This is a major confusion, because if there is not law, how it was harsh?
The second question is, how will FBR calculate and implement the new law on the sale and purchase of local used cars in the country. Let us suppose the bureau has implemented this law for dealers. What is the method of its implementation? For example, if a person bought a car for Rs1.6million a few years ago, then he sells it to a dealer for Rs2million, and the dealer sells it in Rs2.2million, whether FBR will collect 17% tax on the car dealer’s profit of Rs2 lacs or is it applicable from the original price of Rs1.6million?
We think the dealer will pay this new tax on his own profit of Rs 2lacs.
Another possibility is that the government is trying to curb the ‘On’ culture in new cars. But it needs to understand that in regular business, the customer always pays ‘On’ in cash, while full-price transaction is done through the banks. The question arises of how the government will keep a check on it because its administrative cost will be extremely high.
Furthermore, it will increase the cash dealing in the market, leading to flow of black money and fraud.
The most important aspect of this whole scenario is that there is a ban on the commercial import of used cars in Pakistan. Only Pakistani expats can import a used car under Personal Baggage, Gift, and Transfer of Residence Schemes. So, how this new clause/policy is applicable on used or imported cars?
Possible Explanation on Used Cars ‘Tax’
We at PakWheels think that there is only one scenario, where FBR can apply this new policy. That is CBU units that car manufacturers import into the country. The CBU units are new cars, which major companies like Toyota and Honda, etc. import before the launch of a new model, to test the local market’s response about a specific car, or introduce it as a new addition to the local market.
Now the question arises, how this new clause is only for CBUs? The answer is that companies pay 17% GST at the time of import of a car, and a buyer has to pay an additional 17% GST at the time of purchase, which undoubtedly impacts these companies’ sales. Now, these companies could’ve gone to FBR, saying that the government is receiving the sales tax twice on a single unit, which is not right.
So, we think FBR then introduced this new clause under which now the buyer has to pay the 17% sales tax on the value addition only. For example, a company imports a car at the rate of Rs5million. After paying the import duties, including Customs and GST, the price reaches to Rs 7million. When the company sells this car, its price will go around a Rs8.2million, due to 17% GST, which the buyer has to pay, meaning the customer has paid GST twice, one at the time of import and second at the time of purchase.
After this new clause, now the customer will only pay this 17% GST on the car price’s value addition.
We hope that this explanation will remove some ambiguities about the new policy by FBR.
Verdict on Used Cars ‘Tax’
We think that this new SRO will further create confusion in local auto market, which is already passing through a slow phase. The government should explain it in detail to remove all ambiguities because it is essential for a stable market and trade.