The Pakistani government has approved a new automotive policy that offers investment incentives in the form of tax breaks. According to a report by The Express Tribune, the Economic Coordination Committee (ECC) of the cabinet cleared the Automotive Development Policy 2016-21 after a gap of more than two years. Under the new policy, the government has allowed duty-free import of plant and machinery for setting up assembly and manufacturing facility while also allowing import of 100 completely built-up (CBU) vehicles at 50% of the prevailing duty for test marketing after the start of the project. Another big incentive is offered in the form of 10% customs duty on non-localised parts for five years. This contrasts with the current duty of 32.5%. However, this benefit is limited to new investors only while existing players will need to pay 30% customs duty. Duty on localised parts has been reduced to 25% for new entrants and 45% for existing players for a period of five years from the current level of 50%. A single rate will apply on localised and non-localised parts after five years of the new policy, although the present duty structure will continue for seven years for new investors.
Significance: The policy is clearly intended to attract new investments in local assembly and production operations. The light-vehicle market in Pakistan is largely controlled by three players – Toyota, Honda and Suzuki – which operate through local joint ventures. Although the policy is aimed at boosting competition, it seems to have alienated the existing Japanese players. In the past, several reports suggested the government was in talks with European automakers including Volkswagen (VW); however, nothing concrete was announced. Nevertheless, the newly announced policy is a tangible invitation for global automakers to invest in Pakistan where the automotive market offers long-term opportunities, although it is witnessing a high base effect as of now following last year's sharp growth. According to IHS Automotive estimates, Pakistan's light-vehicle market is likely to grow to 269,100 units by 2020 from 191,800 units this year.
