Car sales soar prior to imposition of taxes

Defying all restrictions, the passenger car and jeep sales leapfrogged to a historic high at 28,379 units in June 2022, soaring 24% compared to the previous month and 106% compared to the same month a year ago. The significant growth in the delivery of four-wheelers to buyers came across all segments, but was led by the most expensive jeeps (SUVs – sports utility vehicles) and the most economical cars (below 1,000cc engine capacity).

“Sales soared ahead of the imposition of a couple of new taxes to cool down (import-led) automobile demand with effect from July 1, 2022…and most likely hike in car prices in the ongoing month of July,” Ismail Iqbal Securities’ analyst Muqeet Naeem said while talking to The Express Tribune on Friday. In its recent move to rein in car sales and imports, the government announced on June 10, 2022 the imposition of 1% capital value tax (CVT) on cars above 1,300cc and the doubling of advance tax on cars of 1,600cc and above capacity with effect from July 1.

In the previous fiscal year 2021-22 (ended June 30, 2022), the car sales soared 54% to a record high at 279,267 units compared to 181,397 units in the prior fiscal year, the brokerage house reported, citing Pakistan Automotive Manufacturers Association’s (Pama) data. The previous peak was 258,792 units recorded four years ago in FY18, he recalled. Naeem said “the auto sales have boomed (in FY22), but the burst of the bubble is inevitable later in the current fiscal year (FY23) in the wake of imposition of new taxes, expected hike in car prices and jump in interest rate on car financing by banks…all in July.”

“The new challenge that the auto industry is facing is the prior approval of SBP required for the import of CKD (completely knocked down) kits. This creates problems on the production side, which can delay the lead time of cars that have already been booked,” he said. “Indus Motor has stopped its booking for more than a month, while Kia and Pak Suzuki Motor Company have also closed booking for some of their models. We believe that companies would open the booking soon with the announcement of price hike.”

Data breakdown suggests sales of cars below 1,000cc engine capacity grew 41% to 8,703 units in June compared to May. Sales of SUVs/ jeeps soared 31% to 4,832 units in the month, sales of 1,000cc cars surged 30% to 4,602 units, while sales of 1,300cc and above engine cars increased 6% to 10,242 units. The record auto sales during FY22 was initially led by the reduction in sales tax and federal excise duty across the board, while the lower interest rates at the start of the year also boosted demand through auto financing.

Later, the government reversed the tax benefits through a mini-budget in January 2022, however, the growth trajectory continued owing to a higher lead time. The SBP also revised its prudential regulations in September 2021 to tighten the conditions for auto financing, which was further restricted in June 2022. Latest numbers of auto loans displayed a meagre growth of 0.4% month-onmonth. Average growth of auto financing from November 2021 to May 2022 (post-regulations) was only 1.1% as compared to the monthly average growth of 3% from July 2020 to October 2021.