The government has decided to tighten used cars'' import procedures aimed at discouraging misuse of Commerce Ministry''s schemes by commercial importers and encouraging new investment in auto industry, official sources told Business Recorder. Pakistan''s annual import of used cars is around 30,000 units, mainly from Japan.

Three-year used cars are imported into Pakistan through informal channels. However, Federal Board of Revenue (FBR) earns huge revenue on illegally imported used cars and insists on import of used cars on a commercial basis.

At the same time, new entrants as well as existing players are urging the government to take measures to curb misuse of three schemes of Commerce Ministry by the commercial importers. The sources said the government has recently approved Automotive Development Policy (2016-21) in the absence of existing domestic players'' consent which will be effective from July 1, 2016.

Under the new policy, Ministry of Commerce is to define Standard Operating Procedures (SOPs) under Import Policy Order for used cars to prevent misuse of the facility. In this regard, Ministry of Commerce has sought suggestions / proposals from the concerned quarters, including Ministry of Industries & Production.

The sources said Engineering Development Board (EDB) has sought proposals from stakeholders to firm up appropriate recommendations for the Commerce Ministry. The issue will be deliberated at a meeting of Auto Industry Development Committee (AIDC), which is scheduled to be held on June 9, 2016.

According to the State Bank of Pakistan (SBP), the import of used cars by the Overseas Pakistanis is allowed as per provisions stipulated under Appendix-E of the Import Policy Order 2013 whereby Pakistani nationals are eligible to import a vehicle under personal baggage, gift or transfer of residence scheme .

This scheme was introduced to facilitate Overseas Pakistanis and many individuals have benefited from it. The spirit of this scheme is to make available vehicles to Pakistanis without having to use the foreign exchange resources of Pakistan and payments from Pakistan are not required. However, SBP understands that this facility is being misused by individuals and commercial car importers in Pakistan since importers of used vehicles are purportedly importing vehicles on the passports of overseas Pakistanis.

SBP maintains that the importers remit funds through informal channels ie Hawala/ Hundi to pay for the cost of vehicles which ultimately results in a surge in smuggling of foreign currencies out of Pakistan and diversion of inward remittances through Hawala channels which has a negative impact on the economy.

"This practice, in fact, has defeated the spirit of the scheme," the sources quoted SBP as saying in one of its recent communications on import of used cars. In order to curb the chances of misuse of this scheme and to ensure payments through formal channels, SBP has proposed that the Ministry of Commerce should suitably modify the scheme in consultation with SBP and Finance Ministry.

Ministry of Industries and Production, in its budget proposals, had recommended a massive increase in fixed duty on used imported cars. The MoI&P argued that under SRO 577(I)/2005, duties and tax rates are fixed in US dollars. The fixed duties are highly suppressed and causing a loss of tax revenue to the government and subsidising imported used cars is also damaging domestic auto industry.

The SRO was revised on November 30, 2015 vide SRO 1175(I)/2015 to the extent of vehicles of capacity above 1000cc only, whereas, the rates are way too low for 800cc and 1000cc cars as compared to higher engine capacity cars. According to sources, the market share of local Suzuki Mehran is 78 per cent with sale of 35,260 units whereas the market share of used imported cars up to 800 cc is 22 per cent with 9860 units.

On average, locally assembled 800cc vehicles consume locally produced parts valued at approximately Rs 310,000 per vehicle and for vehicles between 801cc-1000cc approximately Rs 375,000 per vehicle. The sources said the revenue loss below 800 cc cars is Rs 310,000 per unit and if calculated on 9860 imported used cars below 800 cc, total revenue loss has been calculated at Rs 3 billion whereas total revenue loss on imported 10,432 units (801 cc to 1000 cc) has been estimated at about Rs 4 billion per annum.