KARACHI: Local auto assemblers as well as non-filers of income tax returns were in for a rude shock after the government announced the federal budget for 2018-19.
Not only did the government bar non-filers from purchasing property that has a declared value of over Rs4 million, it also put curbs on them from buying new motor vehicles if their names do not feature in the active taxpayers’ list (ATL) of the Federal Board of Revenue (FBR).
“Non-filers shall not be permitted to purchase new motor vehicles manufactured in Pakistan or new imported vehicles,” states the Finance Bill for 2018. If passed by the National Assembly, the proposal would be effective from July 1.
Pakistan requires all its citizens whose taxable income for the year exceeds Rs400,000 to file income tax returns. The process is the government’s way of keeping a record on revenue collection, accumulation of wealth and generally, verify if tax submitted is in line with earnings for the year.
However, in a country of 207.7 million, only 1.26 million returns were filed last year. The proportion of returns filed to overall population stands at 0.6%, and conveys the dismal picture of tax collection in the country.
With this in mind, the PML-N government has taken upon itself to introduce various measures that penalise non-filers, and motivate them through punishment to file returns during its tenure.
The latest measure in the series of punishments is disallowing non-filers from purchasing new vehicles, a move that has the potential to drastically change the auto industry’s landscape, increase consumer financing, as well as encourage citizens to file tax returns.
However, the reaction to the measure – that went largely unnoticed on the day of the budget – has been an adverse one from the industry.
“It will jeopardise all our efforts to counter the menace of premium, as the decision will motivate investors to buy cars and sell to non-filers on a hefty premium,” an industry official told The Express Tribune.
The official recommended the government to increase the difference in tax applicable for filers and non-filers on purchase of vehicles. Currently, non-filers already have to pay a higher amount in withholding taxes and vehicle registration costs.
“This will increase the government’s revenue as well.
“We are hopeful that government will consult stakeholders before the step is implemented. It directly affects one of the biggest industries in Pakistan.”
The budget measure comes at a time when the country’s auto sector is undergoing a massive growth period, and sales figures have touched 192,734 units in nine months of 2017-18, a 22% year-on-year increase.
Motivated by the growth, new auto players are also vying to make a place by setting up assembly/manufacturing plants in the country.
Ghandhara Nissan has already announced the launch of Datsun vehicles, and is expected to roll out variants in 2019.
Lucky Cement is involved in a joint venture with Kia Motors, while Nishat Mills and Hyundai Motor Company are also in the process of entering the market. The three new players would add to the existing three Japanese companies operating in Pakistan, adding spice to the fight for a share in the growing market.
However, the budget measure could possibly dent the auto sector’s growth, says the industry official.
On the other hand, the government looks to be firm in its decision.
“Those on the ATL will be able to buy cars. It will be the responsibility of the companies to see if their customers feature on the list,” FBR’s Member Inland Revenue-Policy and spokesman Dr Muhammad Iqbal told The Express Tribune.
The move to disallow non-filers from vehicle purchase could give rise to changes in the auto sector. It is likely to increase the prices of used cars due to greater demand, while also forcing non-filers to look for alternatives.
One choice for non-filers could be to purchase vehicles in the names of their trusted compatriots who are filers.
However, Iqbal said the move would be a risk on part of the filer of income tax returns.
“This is a risk the market will take. If a filer allows the non-filer to buy the vehicle he will have to explain the source of income (in his returns).”
Analysts believe that while non-filers may find a way out of the conundrum, it is likely to dent sales of the auto sector that has seen its market capitalisation shoot in recent years.
“Right now, the only way out I see is if people start filing tax returns,” said an analyst. “The other way that could work is if you lease the vehicle through a bank. Even then, you will have to become a filer by the time the lease period ends.”
The move, if implemented in its form, is likely to boost consumer finance and be a positive for banks that are expected to see interest-rate hikes this year. It could also lead to greater awareness on tax returns, eventually meaning a higher number of filers.
The writer is business editor at The Express Tribune
Published in The Express Tribune, April 30th, 2018.