Should You Expect Another Price Increase?😮

MG has created a lot of hype in the current auto-market  of Pakistan. M/s JW SEZ (Private) Limited from Pakistan is  in joint venture with SAIC Motors to Introduce MG Motors in Pakistan.  Consumers are very excited for their upcoming and exciting for sale products.  There has not been a single day when we don’t hear about MG.  Earlier, we reported about unhappy customers at one of MG’s flagship dealership in Lahore. And now there is an issue of recoverable customs duty payments, imposed after FBR investigation. And after that, it seems that the price increase in MG cars is inevitable.

Background: 

Back in mid February 2021 , the social media was buzzed with  yet another MG related news and it was more of controversy.  I personally reported about the issue well in details and it was related to FBR investigation of MG Motors over suspected Under-Invoicing Scam  .  The problem surfaced when many MG HS owners in Pakistan reported a problem with the registration of the vehicle. As these are imported vehicles, a BOL/ Bill of Lading / Good declaration is must at registration time.

Many people reported that they were not provided with this document and could not register their vehicles with the excise department. After repeated request to the MG officials in Lahore and Faisalabad for over a month, the BOL were still not given and instead the company handed over goods declaration forms. However, the declared value, the taxes paid on the declared value was struck out with a black marker. 

When some of these individuals went with this document, Excise department in Lahore and Islamabad again declined to register the vehicle because the required information was not visible and the documents were not correct. 

 According to reports back then,  Federal Board of Revenue (FBR) started a probe against Morris Garage (MG) Pakistan.. As per details, FBR launched investigation over suspicion  of  ‘under-invoicing scam’. The report which was also published in independent newspaper further said that “proof” for under-invoicing has also been shared with concerned authorities of government ministers for a proper investigation.

JW-SEZ started importing a large quantity of MG  vehicles, Completely Built Units/ CBU  into the country in September 2020 for commercial sale.  Meanwhile, JW-SEZ, the local partner of MG/ SAIC in Pakistan, JW-SEZ also did apply for Greenfield Status as per the ADP 2016-2021 Auto Developmental Policy .  The policy allowed companies that they can import of 100 CBU units per varaint for test, marketing and launch purposes.

The import of CBU more than the 100 units per variants as allowed per auto policy raised questions. JW-SEZ  informed in this regard that the company  is actually paying full 123.77% incidence of duty [ instead of 50% subsidy] on each unit of MG HS  they are importing. The 123.77% incidence of duty is the correct duty for a vehicle, as per FBR custom tariff, if paid in full. So, as they are paying full duty, any number of the units can be imported, which is undoubtedly correct and has no issues whatsoever.  

MG HS  declared value at customs as $ 11,632 per unit,  additionally  the issues of registration as well as incomplete and blacked out documentations  raised question mark and suspicion of Under invoicing.  FBR took the issue and  Model Customs Collectorate of Appraisement & Facilitation (East), Karachi was asked for Audit  of M/s JW SEZ (Private) Limited.

Response by MG Pakistan: 

Back in February after the issue was raised, responding to these media reports, MG Pakistan head Javed Afridi tweeted: “As new entrants bring in exciting new models at far lower prices, instead of competition, we expect maligning campaigns and baseless rumor’s.” He further said that MG knows that competition is an unfamiliar phenomenon in Pakistan’s automobile industry. “We invite everyone to join in a fair competition to serve Pakistani consumers with a bigger and better variety of vehicles at lower prices,” he further said.

Afridi also stated that for decades, Pakistani automobile consumers have been exploited by “cartels” that cornered them with low quality, boring models at exorbitant prices.

Audit Reports and Audit: 

After the FBR taken the case into further investigation, there were hundreds of vehicles awaiting clearance at Karachi Port. The issue was taken to the Sindh High court by JW-ZEZ via a petition on which the Sindh High Court in its interim judgement  ordered  to release of these MG vehicles under Section 81.  The section is about Dispute over the Valuation of a product between two parties, which, in this case, are Pakistan Customs and MG Motors Pakistan.

Meanwhile, the court directed MG to submit a Pay Order as a guarantee.  If Customs wins the case, it would cash the Pay Order; otherwise, MG would get those Pay Orders back.  Although the Court allowed the release of the vehicles under a Bank Guarantee, the Audit proceedings were still ongoing.

Now recently as per a news report of local English newspaper,  the concerned authority engaged in auditing have completed their report on the matter.   JW SEZ (Private) Limited , SAIC Motor International Co, Ltd. China as well as Engineering Development Board, Islamabad were approached by Directorate Post Clearance South .

During the course of investigation, it was found that JW SEZ imported the first consignment of MG vehicles back in May 2020 , with declared unit price of MG HS @ $ 14,000 , MG ZS @ $ 9,000 while  MG ZS EV @ $22,000.  Later on JE-SEZ imported MG HS @ declared value of $11,632 while MG ZS @ $9,245/-.

The Auditor also informed that JW-SEZ and SAIC International Co. are related parties in the local joint venture operational agreement  [ SAIC with 51% share , JW-SEZ with 49% ] and the transaction value can not be accepted as per Section 25 (1) (d) of Customs Act, 1969, which states that that “two persons shall be deemed to be associated in business with one another if, whether directly or indirectly, either of them has any interest in the business or property of the other or both have a common interest in any business or property or some third person has an interest in the business or property of both of them”

Directorate of Post Clearance Audit examined various method to calculate/ evaluate  the custom value of the imported vehicles and eventually decided to use “Fall Back Method ” as per 25(9) of the Customs Act, 1969.   As per this formula , the declared  unit value of MG HS has been increased  from $ 11,632 per unit to $ 13,314 . A report submitted to National Assembly Standing Committee on Finance also agreed that the “Fall Back Method ” should be used.

The Directorate of Post Clearance Audit further said;

 “Prima facie, the importer is suppressing C&F value of imported vehicles in CBU condition attracting duties/taxes (@ 146% cumulative approx. at import stage by way of under-invoicing/under-valuation to enter into the market,”

The EDB/ Engineering Development Board confirmed that the import of these CBU’s are not under the Auto Development policy and are of commercial nature.  It is interesting to mention that the EDB in their response to Auditor mentioned that JW-SEZ did apply for the Greenfield status and same is awarded to the company although the approved Business Plan has yet to be signed and made official.

Although the 747 units of MG HS which were already cleared provisionally by Sindh High Court as per Section 81, this change in the declared value of the MG HS  forces JW/SEZ to pay the difference in the  custom duties for which a Bank Guaranteed was already placed at time of filing the petition with Sindh High Court .   Mathematically, JW-SEZ had to pay  Rs3.283 Billion as per the new accessed value but paid Rs2.204 Billion , this resulted in shortfall of Rs1.240 Billion, which will now be recovered by FBR under the Bank Guarantee already in place.

Possible Price Hike:

The 747 units [ Under Audit Evaluation ] which were cleared means that the car company would pay the difference, and there would be no burden on buyers of these vehicles, meaning there is no liability on the consumers as long as the vehicle is already delivered to the customer.

Although these 747 vehicles were imported between November 2020 and February 2021 and if there are still some vehicles not yet delivered from this pool, MG can increased the price at the time of delivery especially to the customers who placed their order on partial payments.

Any more vehicles currently in transit or on port awaiting clearance will automatically be accessed as per the new custom value of  $13,314 . MG Pakistan has not made any official statement in this regard but this change in value can result in increase in the sticker price of MG HS currently for sale at PKR-5.4Milion.  I personally think that a 300,000 to 500,000 price increase is possible.    It is pertinent to note that MG Motors Pakistan has closed the booking of MG HS on 19th March although despite this fact some MG dealers were still taking bookings with no delivery time insight and this result in over bookings.

There had been delays in the delivery of MG HS [ due to various reasons ] and many customers obviously are not happy about it and such news can further confuse buyers about the company and their operation. Company need to be very transparent with its customers for a their success.   There is NO clarity that  what a buyer will get as far as his order; A CBU/ Imported Unit, A CKD/ locally assembled unit and if there is any price increase / decrease for the CKD.

MG Angry Over Delay: 

Just recently MG released another social media announcement  regarding the various measures they are taking to facilitate their customers, which is highly appreciated.

 

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