Car manufacturers were shocked by a decline in demand for high end and luxury cars. They were expecting that high-end users would absorb the escalated prices and ignore the trap for tax evaders.
Recently, the government imposed federal excise duty (FED) on all vehicles. FED is now 5.0 percent for cars below 1000cc to 20 percent for luxury cars above 1800cc. Policymakers consulted the auto industry regarding the FED and were told that higher prices would not have a major impact on sales.
The market continued to function without any major decrease in sales, following the rupee devaluation. The auto industry also expected that customers would have no choice but to buy locally manufactured cars following the ban on importing of used vehicles.
Industry experts believe that the decline in new orders cannot be solely attributed to higher prices. They believe that high-end buyers are reluctant to purchase expensive cars because they could be traced by the Federal Board of Revenue (FBR) if they have no source of documented income, through the computerized CNICs. They are concerned that the FBR might ask for their source of income.
This would explain the abrupt decline in the demand for high-end cars produced by Honda and Toyota. Vendors claim that orders for the local parts of these high-end cars for the upcoming six months have declined by approximately 25 to 30 percent.
New entrants to the auto market are more concerned. Their models are more expensive, and so they’re finding it far more difficult to sell their imported vehicles.
Although FED has also been imposed on the low end, under 1000cc cars, their sales are actually on the rise. Perhaps because there are a lot of taxpayers that are opting for these low priced cars compared to the rest of the cars, these cars are priced within the range of 1.2 to 1.65 million.
Currently, there is only one manufacturer that is producing these cars in Pakistan. The company should be able to capture the market for used imported cars, considering its price range even with taxes still falls below the prices of used imported vehicles.
This is why the company has permitted its vendors to produce parts for 6000 vehicles a month for the 660cc version for the upcoming six months.
A decline of 20 percent was estimated for sales in the auto industry because of the economic decline. However, following the ban on import of used vehicles, it is expected that the vacuum created by 70K used cars will be enough to make up for the 20 percent loss in car demands due to the economic downturn in Pakistan.
However, this estimate failed to take into account the documentation factor related to the FBR. Many are of the opinion that there would resurge in demand instantly if the government were to announce a no-questions-asked policy on the purchase of Pakistani vehicles.
On nearly all cars, the government is able to generate 37 to 40 percent revenue on the retail price of the car.
The government would be losing Rs 1.5 million of revenue on ever high-end vehicle and gaining only 450,000 rupees from the sale of low-end vehicles that replace the high-end cars.
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