FBR dismisses proposal for 18% sales tax on cars

Believes lower tax on vehicles will result in revenue loss

ISLAMABAD:

The Federal Board of Revenue (FBR) has turned down a proposal of the Ministry of Industries that sought to impose 18% general sales tax (GST) on locally manufactured cars across the board, saying it will result in a fall in tax collection as well as revenue loss.

The Industries and Production Division was requested to provide its input on the rationalisation of criterion for the imposition of 25% sales tax on locally manufactured and assembled vehicles while avoiding the undermining of tax base by ensuring that no car variant and model became liable to a lower tax rate than what was currently applicable.

In response, the Industries and Production Division, in a recent meeting of the Economic Coordination Committee (ECC), proposed that 18% sales tax should be applicable to all local auto manufacturers and assemblers without any discrimination. It, however, recommended that sales tax should not be increased on cars below 1,400cc engine capacity.

However, the FBR did not concur with the recommendation, believing it would allow sports utility vehicles (SUVs) and other vehicles, currently paying 25% sales tax, to pay only 18% tax. It would lead to the shrinking of the tax base as well as revenue loss, it cautioned.

Therefore, “given the commitment under the International Monetary Fund (IMF) standby arrangement, it would not be possible to agree with the proposal,” the FBR said.

It told the meeting that, considering the unprecedented fiscal and current account challenges and the immediate need to pour resources for stabilisation of the economy, the sales tax on luxury goods, previously chargeable at the standard rate (17%), was enhanced to 25% ad valorem in March 2023.

The enhanced sales tax was also applicable to the locally manufactured and assembled double-cabin vehicles.

It was imposed on locally manufactured and assembled vehicles with engine capacity of 1,400cc and above, and locally manufactured/ assembled SUVs/CUVs as a class, irrespective of the engine capacity.

Read PAAPAM decries proposed sales tax hike

The FBR pointed out that the 25% sales tax on SUVs/CUVs, as a class of goods, created market imbalance for vehicles below 1,400cc engine capacity, making them uncompetitive with sedan cars of similar capacity. It stressed that SUVs/CUVs should be provided a level playing field and to address the anomaly, a summary was sent to the Cabinet Committee on Legislative Changes (CCLC) on August 3, 2023, proposing that all locally manufactured vehicles with price exceeding Rs5 million (excluding sales tax), irrespective of the engine capacity or cabin, be made liable to pay 25% sales tax.

Another summary was sent on December 20, 2023, incorporating the views of the Industries and Production Division and proposing 25% GST on all locally manufactured vehicles with invoice price exceeding Rs35 million (excluding sales tax).

It was pointed out that the proposed price benchmark was reduced from Rs5 million as some of the vehicles, currently liable to pay 25% sales tax, had a price less than Rs5 million.

The CCLC considered the matter and its decision was ratified by the federal cabinet. The CCLC did not agree with the FBR’s proposal and directed it to submit the matter to the cabinet after making a thorough internal assessment.

Accordingly, the matter was reconsidered and it was proposed that the condition of 1,400cc engine capacity may be retained to safeguard the tax base.

However, to provide a level playing field to all luxury vehicles, it was proposed that a price benchmark of Rs4 million (excluding sales tax) may be applied as an additional criterion for levying sales tax at the enhanced rate of 25%.

Resultantly, vehicles below 1,400cc and having price less than Rs4 million would attract the standard tax rate of 18%. It was pointed out that all locally manufactured and assembled vehicles below 850cc would remain liable to pay the reduced tax rate of 12.5%.

Similarly, hybrid electric vehicles would enjoy reduced tax rates provided under the Eighth Schedule of the Sales Tax Act 1990. The estimated annual revenue impact of the proposal would be Rs4.5 billion.

Published in The Express Tribune, March 5^th, 2024.

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