From Consumer Protection to Own Money Issue: An In-depth Glance at Government’s New Auto Policy 2021-26

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The Automotive Industry Development and Export Policy (AIDEP) 2021-26 has been announced, giving way to the new developments and incentives. Earlier policies such as the Automotive Development Policy (ADP) 2016-21 have expired.

It is pertinent to mention that the government is focused on enhancing the local auto industry of Pakistan. Previously, a series of tax exemptions for carmakers in Pakistan was announced in the interest of strengthening and ensuring the growth of the industry. Now, the AIDEP 2021-26 policy has been published, which focuses on enabling the local car industry to shift to complete local manufacturing for added viability and sustainability.

The Ministry of Industries and Production (MoIP) presented the policy before the federal cabinet earlier today, which approved the propositions made in the AIDEP 2021-26, ensuring further development of the Pakistani car industry.

Here are the salient features of the New Auto Policy 2021-26:

  • Minimizing the negative impact of car industry imports on the current account balance
  • Localization
  • Export targeting
  • Consumer protection
  • Promotion of new technologies

No Short Term Effects on Current Account Balance

Following the lapse of the previous auto policy, no new entrants were given the benefits after the 30th of June 2021, except for a select few who were provided relief to launch the following products:

  • Small cars up to 1000cc
  • New model tractors
  • Motorcycles with engine capacity over 125cc (for the export market only)

As per the analysis from the Ministry of Industries and Production, the new products are not likely to observe an increase in imports in the next year due to time lag in investment. This implies that there will not be any short-term ramifications of the policy on the current account balance.

Localization Plan

The AIDEP 2021-26 emphasizes the localization of auto-parts and plans to expand on it in the near future. According to the document, the current rate of localization is as follows:

SectorLocalization Level AchievedTop 10 Localized Parts [SRO 693(I)/2006]
Number of PartsValue of Parts
Motorcycles95%85%Crank Case, Crank Shaft, Piston & Ring, Magneto, Suspension, Transmission, Engine Head, Engine Block, Wiring Harness, Body Parts. etc.
Tractors92%80%Transmission, Crankshaft, Piston, Connecting rod, Engine Valves, Engine Block, Starter Motor, Body parts. etc.
Cars55%45%Suspension, Steering Knuckle, Brakes, Light Springs Leaf, Radiator, Steering mechanism, Windscreen, Body parts, etc.
Truck & Buses15%12%Exhaust/Inlet Manifold, Front Cabin, Wiring Sets, Radiator, Heavy Spring Leaf, Silencer, Cross Members, Floor Assembly, Body parts. etc.

 

It was also highlighted that Pakistan would be able to save a massive amount of foreign exchange in Completely Knocked-Down (CKD) production:

Serial No.DescriptionValue in USD
1Cost of Completely Built unit  (1500 cc )22,000
2Cost of Imported CKD8,000
3Cost of local parts = USD 9000

Less 30 % value addition/local content = USD 6000 approx

6,000
4Difference between CBU & CKD =22000-14000

(CBU import 36 % higher than CKD manufacturing )

8,000
5Average cost of CBU=14000 x 300,000 (if total requirement is imported)4.2 billion
6FE saving if manufactured locally = 36% of 4.2 billion1.5 billion

 

Make in Pakistan Initiative

Keeping with the interest of indigenizing the production of vehicles, the AIDEP 2021-26 also entails the “Make in Pakistan Initiative” that entails the following:

  • Components or sub-assemblies shall not be eligible for concessions if the local value addition is less than 30%.
  • Manufacturing of parts to be localized through a bi-annual update of lists (SRO-693), resulting in enhanced tariffs if imported.
  • The first update of the AMAX list will include 22 other parts (first update after 2006).
  • Following six months’ target set for manufacturers for localization of parts.
  • The policy aims to localize 100% of motorcycle parts and 75% of car parts by 2026.

New Model Policy

  • For Agricultural Tractors of new make or new model as certified by EDB, the Customs Duty (CD) on localized parts will be 15% (20 % advantage) for three years from the date of manufacturing certificate or up to the 30th of June 2026, whichever is earlier.
  • For motorcycles exceeding 125 cc, motorcycle rickshaws, and auto-rickshaws exceeding 200cc as certified by EDB, the CD on localized parts will be 30% (reduced by 16%) for three years from the date of issuance of the manufacturing certificate or up to the 30th of June 2026, whichever is earlier. In contrast, non-localized parts attract CD at 15%.
  • The cut-off date for issuing the manufacturing certificate is the 30th of June 2023.

Consumer Protection

A point of contention among the Pakistani car buyers, consumer protection, has been a long-debated issue among the car buyers. The AIDEP 2021-26 seeks to address the said concern by adding the following clauses:

Own Money Issue

The government will impose heavy penalties on carmakers who delay deliveries for more than 60 days. The fines shall amount to 3 percent of the vehicle’s price plus KIBOR. The clause has been added to bridge the demand and supply gap and eliminate the ‘own money’ issue.

The government will impose an extra tax of Rs. 50,000 to Rs. 200,000 at the time of registration if the motor vehicle is sold before registration by the original purchaser.

Auto Sector Monitoring Committee (ASMC)

The government will ensure the formulation of a committee under the chairmanship of the MoIP secretary. The committee will incorporate representatives from the Engineering Development Board (EDB), Ministry of Commerce, Federal Board of Revenue (FBR), Competition Commission of Pakistan (CCP), Ministry of Science and Technology (MoST), State Bank of Pakistan (SBP), Pakistan Automotive Manufacturers Association (PAMA), and Pakistan Association of Automotive Parts & Accessories Manufacturers (PAAPAM).

The committee will be responsible for the following:

  • Addressing consumer grievances, including ‘Own Money’ and delayed deliveries.
  • Safeguarding customers on quality issues.
  • Implementation of WP-29 safety regulations.
  • Minimum initial payment not to exceed 20% of the price.
  • In case of non-compliance with policy interventions, the committee will have the right to stop the incentives.
Other Clauses
  • Online booking system to be introduced by all OEMs for cars, LCVs & HCVs to ensure traceability.
  • Upfront payment restricted to 20% for cars, LCVs, SUVs, i.e., OEMs will entertain booking requests on payment of  20% of the total invoice amount at the time of booking.

Export Targets

The government has set a timeline whereby the export targets shall be ensured. These export targets are indicative and shall be reviewed and enhanced periodically as per the following timeline:

Financial YearObligatory export as % of import value
2021-220%
2022-232%
2023-244%
2024-257%
2025-2610%

 

The government will also ensure the formulation of the Auto Industry Development and Export Committee (AIDEC), which will deal with technical matters of the auto sector under the chairmanship of CEO EDB. In contrast, the board itself will act as a committee’s secretariat.

Electric and Hybrid Vehicles

The automotive industry is moving ahead at a fast pace in terms of technological advancement. With that under consideration, the government has decided to incorporate a clause regarding updates of powertrain technology, which includes:

Incentive For EVs
  • Parts specific for EVs to be imported at 1% Customs Duty.
  • No Sales tax on EV-specific parts at import stage.
  • 1% Sales Tax on sale of locally manufactured EVs.
  • Zero taxes and duties for capital machinery imports and charging infrastructure.
  • Electric buses and trucks can be imported at 1% Customs Duty.
Incentives for Hybrids
  • Parts specific for plug-in hybrids to be imported at 3% Custom Duty
  • Parts specific to normal hybrids to attract 4 % Custom Duty

Other Policy Approvals

Approvals Already Given in Finance Act 2021
  • New product policy for up to 850cc cars (incentivized tariffs).
  • New Product Policy for motorcycles & tractors (incentivized tariffs).
  • Promotion/continuity of EV Policy.
  • Promotion of new technologies, e.g., hybrids.
  • Adoption of safety regulations.
  • Ensuring local value addition & bi-annual updates of localized parts.
  • Consumer Protection (Kibor+3% on delivery beyond 60 days).
  • Bringing the prices of locally manufactured cars above 1000cc down by reducing of Federal Excise Duty by 2.5 percent on each category of cars, SUVs, and LCVs:
    • 7.5% to 5% for vehicles up to 2001cc and above
    • 5% to 2.5% for vehicles between 1001cc and 2000cc
    • 2.5% to 0% for vehicles up to 1000cc
Approvals Required from Cabinet
  • Notification/SRO to allow the import of CBUs 10 per variant maximum 100 units for cars 200 units for 2-3 Wheelers at 50% of levied Customs Duty (CD) for manufacturers for marketing and showcase purposes.
  • Notification/SRO for duty-free import of plant and machinery for setting up plants for EV manufacturing.
Approvals Required: Money Bill

Amendment through Money Bill requested for:

  • Incentives for local manufacturing of small and fuel-efficient vehicles (car/van/LCV) at affordable prices.
  • Applicable to all present and upcoming vehicles up to 850cc.
  • Enhancement of cut-off date & timelines for New Product Policy for Cars motorcycles & tractors
    • New Product Policy CD (15-30%), two (three) years from manufacturing certificate or 30 June 2024 (2026), whichever is earlier – cut-off date of approval: 30th June 2022 (2023).
  • Sales Tax concession to be extended to pickup trucks and LCVs of up to 1000cc.
  • Extension of 5% CD for HCVs in current finance bill to new entrants (Procedural issue/SRO/ to be added in relevant table).

Shortlisted UNECE’s Safety Regulations for Adoption

DescriptionUN Regulations (UNRs)Vehicle Category
Active  SafetyBrakesR 13 & R 13HPassenger Cars and Vans + Commercial Vehicles &  Buses
SteeringR 79Passenger Cars and Vans + Commercial Vehicles & Buses
TiresR 30Passenger Cars and Vans
LightingR 48Passenger Cars and Vans + Commercial Vehicles & Buses
Passive SafetySafety Belts  Anchorages& BeltsR 14 & R16Passenger Cars and Vans + Commercial Vehicles & Buses
Seats / Head RestraintsR 17 & R 25Passenger Cars and Vans
CollisionR 94, R 95 & R 135Passenger Cars and Vans
AirbagsR 121, R114Passenger Cars, and Vans
General SafetySafety GlazingR 43Passenger Cars and Vans
Mirrors & CamerasR 46Passenger Cars and Vans + Commercial Vehicles & Buses
Anti-theftR 18Passenger Cars and Vans + Commercial Vehicles & Buses

 

Emphasis on Cheap Cars

Following the upsurge in demand for crossover SUVs, the government has decided to emphasize the promotion of economy cars with smaller engines. For affordable cars, the government has launched the ‘Meri Garri Scheme’ as per which vans & Light Commercial Vehicles (LCVs) up to 1000cc, will get the following benefits:

  • All taxes removed (ACD(0%), AST(0%), WHT(0%) & FED(0%), ST reduced to 12.5%) on locally manufactured cars
  • Reduction in taxes on CBUs (ACD 0%)
  • New Product Policy CD (15-30%) +ST @12.5

These benefits apply to new models of all existing carmakers and new entrants. These incentives are valid for a maximum stretch of three years for all automakers. However, for those who receive the production certificate later, the cut-off date for the incentives will still be the 30th of June 2026.

Conclusion

The AIDEP 2021-26 has several clauses for further bolstering the Pakistani automotive industry’s development. Special attention has been paid to developments like localization of vehicles, parts, protection of consumers, and incorporation of technology and safety. However, only time will be the true judge of the success of the enactment and implementation of the policy.

 

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