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Saturday June 15, 2024

Taxing the auto industry

Robust industrial policy is capturing attention around world as a driver of economic and broader societal goals

By Muddassir Ahmed
May 24, 2024
A worker is fixing gate of a car at an auto manufacturing unit. — AFP/File
A worker is fixing gate of a car at an auto manufacturing unit. — AFP/File

Economists of the 20th century believe that a thriving industrial sector is crucial to the development of a modern economy. In 2010, Cambridge economist Ha-Joon Chang observed that development without industrialization is like Shakespeare’s Hamlet without the Prince of Denmark.

A robust industrial policy is capturing attention around the world as a driver of economic and broader societal goals. This is especially true in lower income countries, where industrialization is still a crucial driver of economic growth.

Beyond its direct economic impact, industrial development also presents a number of complementary social and environmental benefits. The inclusion of industrialization in the 2030 Agenda for Sustainable Development as Sustainable Development Goal 9 (SDG 9) also reaffirms its central role in the overall development picture.

Unfortunately, Pakistan – being a developing country – has so far failed to develop a robust industrial policy. The government is also not particularly good at identifying sectors that should be promoted. A case in point is Pakistan’s local automobile industry which – despite creating millions of jobs, contributing billions to economy, supporting the relevant industries/vendors, and posting billions to the national exchequer – is the victim of severely damaging unfavourable policies.

It is indeed surprising to note that in the Pakistani market, where automobiles are manufactured/assembled in the country by 13 leading players, the authorities have permitted importing used cars, and that too at much favourable terms at the expense of Pakistan’s local automotive (OEM) manufacturers/assemblers. The automobile industry and associated vendor network currently host over 2.5 million jobs, with wider industry related jobs connected to the sector reaching to the tune of almost 5.0 million.

The automobile industry in Pakistan, a crucial contributor to job creation and government revenue, is currently facing significant challenges due to the influx of imported cars driven by the government’s lenient import policies. This surge in imports, particularly of used cars, is severely impacting the already struggling local auto industry, undermining its efforts in achieving localization. Reports indicate a staggering increase in imported used cars, surpassing 6,000 units in the financial year 2022-23, with over 1,200 units imported in May and June alone.

Despite its challenges, the local industry ranks among the few globally capable of manufacturing a diverse range of vehicles, including passenger cars, trucks, buses, and tractors, with over 60 per cent localization achieved through the production of high-quality, internationally tested components.

Moreover, the industry operates under heavy tax burdens, often resulting in inflated retail prices that include heavy taxes and duties. Yet, it remains a sector committed to conducting transactions through legal banking channels.

Recognizing the major role of the automotive sector in Pakistan’s economic growth, the stakeholders are calling on the government to reassess its policies, advocating measures that promote a conducive environment for the local industry growth, job creation, increased economic contribution, and alignment with the national development objectives. Such support is essential to sustain and enhance the competitiveness of the local auto industry in the global market, while addressing the challenges posed by unchecked imports.

In fact, an industry that currently stands at the 34th number among the 49-passenger car manufacturing countries and is among only those 16 countries in the world that manufacture the complete vehicle segments including passenger cars, LCVs, trucks and busses, tractors, deserves full support and incentives from the government.

Pakistan’s automobile industry’s progress in the face of challenges is simply remarkable. Despite all the challenges, it has localized over 60 per cent of manufacturing, by producing these internationally tested and high-quality local parts. But unfortunately, overwhelmingly burdened by taxes and duties.

On the other hand, the importers of used cars are enjoying highly favourable and partial taxation and duty policy. This sort of treatment to the local automobile industry is severely damaging the local industry resulting in reduced demand in locally manufactured automobiles, reduced efficiency of the production facilities, loss of jobs for vendors and loss to the local industry and national economy.

There is, therefore, an urgent need to revisit the import policy of used cars. Keeping in view our foreign exchange reserves position, it is high time that import of used cars be discouraged though a strict import policy, giving a boost to the local automobile industry and our economy as a whole.

According to a report with a feasible taxation policy for the local automobile industry and a tough import policy for used cars, Pakistan can place its car industry on a sustainable path – neither shielding incumbents nor leaving them stranded but enabling homegrown automakers to compete globally. The road ahead remains long, but with skilful navigation, Pakistan’s economy can shift gears to reach its destinations faster.

The writer is an automotive analyst. He can be reached at:

muddassir_5@hotmail.com