The government has decided to change the way federal excise duty (FED) is applicable to the auto sector. Multiple tax slabs have been introduced during the budget announcement for the fiscal year 2019-20 which will reduce the impact on popular sedans and split the duty among all car buyers. The govt also plans to remove extra taxes on the sale of auto parts, hence reducing the price of manufacturing vehicles.
According to the announcement, cars of engine capacity ranging from 0 to 1,000cc were proposed to be taxed at 2.5%, cars from 1,001cc to 2,000cc at 5% and cars from 2,001cc and above at 7.5%.
The Minister of State for Revenue, Hammad Azhar, while presenting the budget highlighted that 10% FED was introduced on cars of 1,700cc engine capacity and above through the Finance Supplementary Second Amendment Act 2019.
Now, it has been proposed to increase the scope of FED. The minister also pointed out that currently, extra tax of 2% was payable on many items such as lubricants, batteries, auto parts, tyres and tubes, which was in addition to the sales tax.
Hammad suggested the withdrawal of the extra tax on auto parts and moving some items to the Third Schedule of the Sales Tax Act.
“In order to realize the full revenue potential, it is proposed that these items (auto parts and arms and ammunition) be moved to Third Schedule of the Sales Tax Act 1990. However, the government has proposed the withdrawal of extra tax on auto parts to reduce the cost of production of the local industry,” elaborated Azhar.
Different research analysts have termed the recent tax slabs counteractive for the sector. “This is negative news for the automobile sector,” said Topline Research analyst. JS Research termed the new tax slabs a negative development for the sector.
“Initially, the duty was levied on the engine capacity of 1,700cc and above, but now the government has spread it across the board.” The consumers’ purchasing power was already weak and this decision would lead to a hike in car prices, which would take the vehicles out of the reach of common man, he said.
The new tax scheme could prove fruitful for all automakers as the current FED on 1700cc and above cars has negatively impacted some of the automakers while the rest enjoy duty-free sales. With this scheme, the burden can be split among all buyers instead of a single FED and help level the field for automakers manufacturing vehicles of higher engine capacities.