Budget 2012: Incentives expected for new entrants in the automobile sector

‘Profitability of existing auto assemblers to remain under pressure’.

KARACHI:

The government is expected to give some incentives for new entrants in the automobile sector in the upcoming budget for fiscal 2011-12, but this could be negative for the existing assemblers who have already witnessed frequent changes in depreciation rates for imported vehicles, according to Topline Securities.

There are also some proposals encouraging import of cars, which may cause further dent in local industry’s profits.

In a first blow to the local automobile sector, the government on Saturday increased the rate of tax concession from one per cent to two per cent per month on import of used vehicles under the gift and transfer of residency scheme.

However, the government is not expected to reduce customs or regulatory duties on imported vehicles and components, said Topline Securities analyst Furqan Punjani in a research note. Also, the government will not increase age limit and deprecation rates, adds the note.

Impact

Relaxed duty structure for new entrants will remain a key concern for local assemblers as that will create discrepancy between existing and new assemblers’ product prices.

Already concerned by shrinking margins amid rise in Japanese yen against the rupee and recent production concerns, the profitability of local auto assemblers is expected to remain under pressure.

Furthermore, with no focus of banks on consumer financing, growth will also be a concern for the sector, the note adds.

Published in The Express Tribune, May 24^th, 2011.