All You Need to Know About Auto Policy 2021-26

313ghazi · Dec 23, 2021

TLDR;

- No discounts on imports
- Localisation targets - The policy aims to localize 100% of motorcycle parts and 75% of car parts by 2026.
- Fines for "own money" scam, helped by online booking for cars
- Export targets, oglibitary 10% of import value by 2026
- incentives for EV's and hybrids
- Focus on cheap cars

Full details below;

======================

The Automotive Development Policy (ADP) 2016-21 has expired, giving way to the new developments and incentives under the Automotive Industry Development and Export Policy (AIDEP) 2021-26.

Earlier this year, the government announced a series of tax exemptions for carmakers in Pakistan in the interest of strengthening and ensuring the growth of the industry. The AIDEP 2021-26 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 which will ensure further development of the Pakistani car industry. As per an official document available with ProPakistani, here are the salient features of the policy:

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 June 30, 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 lays a particular emphasis on 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:

Sector	Localization Level Achieved	Top 10 Localized Parts [SRO 693(I)/2006]
	Number of Parts	Value of Parts
Motorcycles	95%	85%	Crank Case, Crank Shaft, Piston & Ring, Magneto, Suspension, Transmission, Engine Head, Engine Block, Wiring Harness, Body Parts. etc.
Tractors	92%	80%	Transmission, Crankshaft, Piston, Connecting rod, Engine Valves, Engine Block, Starter Motor, Body parts. etc.
Cars	55%	45%	Suspension, Steering Knuckle, Brakes, Light Springs Leaf, Radiator, Steering mechanism, Windscreen, Body parts, etc.
Truck & Buses	15%	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 will be able to save a massive amount of foreign exchange in Completely Knocked-Down (CKD) production:

Serial No.	Description	Value in USD
1	Cost of Completely Built unit (1500 cc )	22,000
2	Cost of Imported CKD	8,000
3	Cost of local parts = USD 9000 Less 30 % value addition/local content = USD 6000 approx	6,000
4	Difference between CBU & CKD =22000-14000 (CBU import 36 % higher than CKD manufacturing )	8,000
5	Average cost of CBU=14000 x 300,000 (if total requirement is imported)	4.2 billion
6	FE saving if manufactured locally = 36% of 4.2 billion	1.5 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 in case 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 further parts (first update after 2006).
Next 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 30th 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 June 30, 2026, whichever is earlier, whereas non-localized parts attract CD at 15%.
The cut-off date for issuance of the manufacturing certificate is 30th 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 ‘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 prior to 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 Year	Obligatory export as % of import value
2021-22	0%
2022-23	2%
2023-24	4%
2024-25	7%
2025-26	10%

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 whereas the board itself will act as a secretariat of the committee.

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 for 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 also (Procedural issue/SRO/ to be added in relevant table).

Shortlisted UNECE’s Safety Regulations for Adoption

	Description	UN Regulations (UNRs)	Vehicle Category
Active Safety	Brakes	R 13 & R 13H	Passenger Cars and Vans + Commercial Vehicles & Buses
Steering	R 79	Passenger Cars and Vans + Commercial Vehicles & Buses
Tires	R 30	Passenger Cars and Vans
Lighting	R 48	Passenger Cars and Vans + Commercial Vehicles & Buses
Passive Safety	Safety Belts Anchorages& Belts	R 14 & R16	Passenger Cars and Vans + Commercial Vehicles & Buses
Seats / Head Restraints	R 17 & R 25	Passenger Cars and Vans
Collision	R 94, R 95 & R 135	Passenger Cars and Vans
Airbags	R 121, R114	Passenger Cars and Vans
General Safety	Safety Glazing	R 43	Passenger Cars and Vans
Mirrors & Cameras	R 46	Passenger Cars and Vans + Commercial Vehicles & Buses
Anti-theft	R 18	Passenger Cars and Vans + Commercial Vehicles & Buses

Emphasis on Cheap Cars

Following the upsurge in the demand for crossover SUVs, the government has decided to lay particular emphasis on 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 are applicable 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 at a later date, the cut-off date for the incentives will still be June 30, 2026.

Verdict

The AIDEP 2021-26 has several clauses for further bolstering the Pakistani automotive industry’s development. There’s a heavy emphasis on localization of vehicles, parts, protection of consumers, and incorporation of technology and safety. It is yet to be seen, however, as to how well the policy is enacted and implemented in the coming days.