Car buyers in no rush ahead of sales tax hike

KARACHI: Consumers have not shown any enthusiasm to pre-book or lift vehicles on cash despite the Economic Coordination Committee of the Cabinet’s decision to increase the sales tax to 25 per cent from 18pc.

The caretaker government has yet not issued a statutory regulatory order (SRO) to enforce the hike in general sales tax on locally produced vehicles of 1,400cc and above carrying ex-factory price of Rs4 million or above.

Authorised dealers, who asked not to be named, said one of the reasons for the lack of any panic buying was that consumers had already purchased vehicles in January as a result of a change of model year.

The sales of cars, LCVs, jeeps and vans swelled by 81pc in January to 10,536 units from 5,816 in December 2023.

They said that the vehicle’s prices are already very high followed by expensive financing making many prospective buyers hesitant towards purchasing new models during 7MFY24.

In March 2023, the government had already raised the GST to 25pc from 18pc on locally assembled SUVs besides locally made vehicles having engine capacity of 1,400c and above and also on double cabin (4×4) pick-up vehicles.

Auto assemblers and their vendors are now alarmed over the recent ECC decision which they think would prove further devastating for the already depressed sales of locally made vehicles.

Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) chairman Abdul Rahman Aizaz said that the government’s March 2023 move to increase GST along with other taxation measures and devaluation of the rupee had already contracted automobile sales to just 30pc of FY22 levels. This decline has not only hampered auto part manufacturing and job losses but also resulted in lesser absolute tax collection from the automobile sector.

Soaring energy prices, currency devaluation of over 160pc in just six years, exceptionally high financing rates, and over 40pc taxation on every car sold have already curtailed sales to just 100,000 cars/SUVs against the installed capacity of 500,000 vehicles, PAAPAM chief noted.

“Increasing the GST to 25pc on small-size sedans would push the prices beyond the purchasing power of the country’s middle class. It would not only hurt the customers but would also yield less collection of tax due to an anticipated drop in sales.

Offering a different view, an industry representative said it is a good move as the government has removed an anomaly in GST law which was long outstanding.

He recalled that GST was raised in March 2023 but the SRO did not define what was considered as “luxury” in terms of the vehicle price.

He added that the government has now defined a threshold that the vehicles will be considered as luxury if its price net-off applicable GST will be Rs4m which effectively removes the anomaly and provides a level playing field.

However, vehicles below 850cc will continue to attract 12.5pc GST, while up to 1,000cc and sedans below 1400cc, whose price remains below Rs four million, will carry 18pc GST. Hybrid vehicles will continue to enjoy 8.5pc GST.