The federal government has proposed a 2.5 percent increase in Federal Excise Duty (FED) on all vehicle imports in the 2022-23 fiscal budget. The decision is awaiting the federal cabinet’s approval.
According to a senior Federal Board of Revenue (FBR) official, the next budget will include significant amendments in Chapter 87 of the Pakistan Customs Tariff.
He added that the government will impose duties on the imports of sports cars, minivans, off-road vehicles, golf carts, motorcycles, all-terrain vehicles (ATVs), snowmobiles, support vehicles, and vehicle assemblies, and components used in manufacturing.
Both locally assembled and completely built-up (CBU) cars are likely to become more expensive once the new duties are in place, the official added.
The government has begun shifting the burden of Pakistan’s struggling economy directly onto the general public by removing tax reliefs and imposing new levies on several major sectors.
A renowned global economist, Gonzalo Verela, criticized this strategy and tweeted:
— Gonzalo Varela (@gonwei) April 19, 2022
Pakistan’s widening Current Account Deficit (CAD) is due to a savings/investment imbalance, and the solution for it entails policies that increase savings, Varela argued.
He added that import duties might be a short-run solution to curb imports, but they will curb exports as well by increasing profitability in domestic sales, which would prompt the firms to focus only on the local market. “Import duties are implicit export taxes. They won’t reduce the CAD,” Varela explained.
He further remarked:
“[Import Duties] are not just ‘not the solution’. They are a big problem. Why? When levied on inputs, they reduce the productivity of firms, because they reduce their options on how to produce. Higher input tariffs mean less productivity, fewer sales, and lower wages”.
Automakers are cognizant of these arguments and are worried about their fate in Pakistan.