Car assemblers expect reduction in duties

[LahoreEstate]

By Moonis Ahmed

KARACHI: After witnessing a decline of 50 percent in volumetric sales in July-April 2008-09, local car assemblers are expecting some relief in the upcoming budget in the form of abolishment of federal excise duty and reduction in withholding tax (WHT).

Although, the current fiscal year has been Annus horribilis for the auto industry but the industry is expected to revive in beginning of FY10 and there could be some cushions in the coming budget for the industry, Atif Zafar, analyst at JS Research said.

In the Budget FY09, government had increased federal excise duty from 1 percent to 5 percent resulting in considerable increase of the per unit price. Local car assemblers in their proposals for the budget have suggested eliminating federal excise duty. “It is expected that this proposed measure will be approved by the government and the duty will be abolished,” he added.

Moreover, fixed amount of WHT was imposed on sale of cars and LCVs at registration stage in Budget FY09. Now it is expected that it would be reduced to provide some support to declining auto sales.

The car importers have also proposed to increase the age limit on import of old completely built unit (CBUs) from 3 to 10 years. With the current age limit, the final price of the cars are on the higher side, and it is likely that the government would increase age limit from 3 to 5 years to pressurise local auto companies to reduce prices.

Increase in age limit on import of old CBUs is likely to put pressure on the local car assemblers to reduce their prices, hence negatively affecting their gross margins.

Economic slowdown, high car prices, political tensions and high rates of car financing have severely affected auto sales in the outgoing fiscal year. “The overall car sales are expected to show a negative growth of 47-49 percent in FY09,” analyst added.

The local car sales are expected to grow at a compound annual growth rate (CAGR) of 12 percent over FY10-12 amid expected economic recovery, positive government policies, improvement in political situation and resumption of auto financing facility driven by improved liquidity. Moreover, relatively stable rupee and declining steel prices are expected to enhance sector’s gross margins.

According to the State Bank of Pakistan’s third quarterly report the automobiles industry is facing significant contraction in demand (except for tractors where domestic production is low). In particular, jeeps and cars sub-sector is the worst hit by the sluggish demand due to continued increase in prices, rise in cost of financing, as well as lower availability of institutional financing given risk averse policy of banking sector amid increasing non-performing loans (NPLs) and liquidity problems with the banks.

On the other hand, motorcycle industry suffered from increased prices of petrol (in early months of FY09) and less than expected prices of major crops dampened the demand for two wheelers in rural areas, the report further said. Demand for motorcycles is likely to recover following a bumper wheat harvest and substantially higher prices of the crop.

Whereas overall contraction of economy and slack government buying led to decline in the demand for light commercial vehicles (LCVs), busses and trucks during Jul-Mar FY09.

http://www.dailytimes.com.pk/default.asp...2009_pg5_8