Non filer issue for car buying looks more political rather than country’s core issue

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It seems that the issue of allowing non filers to buy cars has become more politicized rather than becoming a serious issue after a sudden interference by acting president of Federation of Pakistan Chambers of Commerce and Industry (FPCCI) Waheed Ahmed.

Lamenting the proposed measures to allow non fillers to buy property and vehicles, FPCCI acting president said it would defeat the prime objective of broadening the tax base and incentivize the fillers to become non-filers so that they may not be required to go through the hassle of audit and cumbersome process of filling of income tax returns.

The issue has certainly lost its credibility as only FPCCI has showed concern while other trade bodies are silent. FPCCI is now under the influence of leadership that has a soft corner for PML-N which has barred non filers from buying cars from July 1, 2018. As a result, the acting FPCCI president without knowing its repercussions on auto sector took full advantage in lambasting the PTI government for reversing the decision recently announced in the Mini Budget.

Adding fuel to the fire, Pakistan Business Council (PBC), led by Ehsan Malik, also jumped in by criticizing the move of allowing non filers to own cars. However, PBC does not have any members from the car, light commercial vehicles and heavy vehicle industries in its membership list that would have forced PBC to issue statement.

As a result of a rising storm, the PTI government, like past one month practice of being confused of taking any bold decisions, came under pressure which is evident from fresh statement issued by Finance Minister Asad Umar in the press for reviewing non filer issue, thus again causing anxiety among the auto and real estate players.

Unfortunately, lack of coordination among PTI leadership has also given much room to the FPCCI and PBC to make uproar. In contrast, auto sector feels that prohibiting non filers will cast shadow on the growth of auto and its allied industries.

Prior to Asad Umar’s changing mood towards non filer issue, Minister of State for Finance Hammad Azhar in a statement to a leading English daily had clarified government’s position by saying that the reversing a ban on non filers of tax returns to buy or sell new cars and property was not taken under any pressure from the automobile companies or property developers.

The State Minister was referring to the criticism of former finance minister of PML-N government Miftah Ismail who introduced the ban on the purchase of new automobiles and first registration imported cars by non-filers.

Showing disappointment on lifting ban on non tax payers by the PTI government, he tweeted that the PML-N government was under intense pressure from the auto companies and land developers but the government didn’t budge. “Automakers (and property developers) have won and Pakistani taxpayers have lost,” he tweeted shortly after the bill was moved in the Assembly in third week of September.

Hammad Azhar said the step was taken because many in the government felt the ban violated Article 23 of the constitution. There was no pressure on us by any lobby, he said claiming that nobody from the auto sector or property developers even contacted the government when this measure was taken up.

Article 23 of the constitution states “every citizen shall have the right to acquire, hold and dispose of property in any part of Pakistan, subject to the Constitution and any reasonable restrictions imposed by law in the public interest.

He said plenty of case law exists where “reasonable restrictions” has been interpreted, and since the article spells out a fundamental rig¬ht, all these interpretations have taken a very narrow view on what can be considered “reasonable restrictions.

Further, registration of properties is a provincial subject. Any restriction placed by a law passed by the federal government can be considered as an encroachment on the mandate of the provincial government, and thereby challenged in court.

In addition, he said the ban, which was effected through Section 227C of the finance act passed by the PML (N) government as its departing budget presented plenty of “practical difficulties”, such as “differentiating between overseas Pakistanis, retired people, and younger people who might own a car but are not required to file tax returns”. “The law allows for a huge segment of people to not file returns,” he said. “The previous government did not think about that when they passed this ban. We are working on a mechanism that is workable and practical instead of a blanket ban to disincentivise non-filers,” Hammad said.

He also pointed to reduced tax collections in the months of July and August of this fiscal year because of the ban. When the State Minister had defended the move then why Finance Minister Asad Umar came out with a new twist of reviewing the issue of non filers? There must be some kind of pressure from a more powerful lobby than auto and property stakeholders which forced the finance minister to take a U-turn or change his stance. Surprisingly was Mr Umar not aware about what Mr Hammad had clarified?
Many tax experts believe that the decision of restricting non filers to buy vehicles and property was a right and bold step taken by PML-N government towards documentation as this was the only solution to check income statement of a person. The restriction may prove effective in raising the number of non filers towards to pay tax if they are really sincere to their country. They believed that restriction would help in curbing speculative business in auto and property sectors.

It is hard to say right now whether the PTI government will really be able to succeed in taking a final decision on non filer issue or will come out with additional measures and conditions for the non filers in order to at least lure them for becoming a filer.
According to a print media analysis, one thing is unfortunate that all the government restriction towards non filers is for buyers of new locally assembled and imported cars rather used cars. Non filers can buy already registered used cars or unregistered imported used cars.

Tax evaders should be discouraged for buying anything but the rule should be applied evenly on all cars that are registered for the first time in Pakistan. Non-filers must be completely restricted from buying unregistered used cars.

According to the previous law the non-filers could buy even used luxury cars worth Rs 10-20 million. This government in the new finance bill though has limited the purchase of used cars by non-filers to Rs five million which is still higher than the price of any car produced in Pakistan.

The government needs to clarify more things. Some buyers lease cars through banks. Banks are all tax filers and the car remains in the name of bank till the buyer pays the total amount in 3-5 years.

Thus technically the non-filers can still get a brand new car which will be transferred in their name after the aforementioned period. The print media news analysis says if the government is serious in penalising the tax evaders it should ban the purchase of all vehicles that are registered for the first time in Pakistan.

Auto vendors are more worried than auto assemblers because one loss of job in auto assembly means lay off of at least eight to 10 new jobs in the vendor industry directly and indirectly. They said that auto assemblers will start importing CBU vehicles whenever they want but vendors cannot sustain the shock of closing down of their unit as it will affect employment chain besides affecting industrial base.

Chairman Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) Mohammad Ashraf Sheikh said PAAPAM represents 400 auto parts manufacturers and their 600 Tier 2 suppliers. PAAPAM thanks the government for rectifying an anomaly regarding on non filers.

Vendors are proud to contribute to the government’s nation building efforts by saving precious foreign exchange (through import substitution to the tune of $1.5 billion annually), providing employment to 3 million Pakistani citizens, and generating tax revenues up to 2 per cent of GDP (as we are a fully documented industry), he said.

He said PAAPAM fully supports the government’s endeavor to widen the tax net through conversion of non-filers to filers. However, the Association believes that cannot be achieved by taking away the legal rights of citizens to purchase assets and, at the same time, shutting down businesses of related industries. This matter should be resolved at the level of FBR as they have access to required data for pursuing non-filers. An act of not allowing non-filers will not lead to an increase in filers, rather purchase of a vehicle by non-filers makes them prone to accountability and bringing them into the net. Many of potential buyers affected under previous policy were for small cars, belong to rural areas and hence are not required to file returns being agricultural income earners. Overseas Pakistanis, widows with inheritance income and small businesses under threshold.

Since the restrictions were imposed in May 2018, future bookings of automobiles are continuously declining. Consequently, demand for local auto parts will also drop drastically, forcing the auto parts manufacturers to start considering layoffs of workers in their respective industries, he said.

Former Chairman PAAPAM, Aamir Allawala said the potential increase of a few thousand NIL-filers as a result of restoring restrictions on auto purchases will be achieved at a huge cost to new foreign investment in auto sector and will lead to significant job losses in the industry while adversely impacting Government revenue collection on car sales

Pakistan is one of the 40 automobile manufacturers in the country. The auto industry consists of 4 of the top 10 global car manufacturers (Toyota, Suzuki, Honda and FAW) along with 400 tier-1 manufacturers of automobile components spread all over Pakistan.
Since announcement of the 5-year auto policy (2016-21), the industry has received tremendous response from several global automakers, he said.

As of now, 12 companies have been approved as new entrants. The plants in advance stage of construction with investment of $850 million include world renowned brands such as Hyundai, KIA, Renault, Changan, Ghandhara Datsun, Foton and local companies such as United, Regal and Sazgar. Restrictions on non-filers and subsequent market shrinkage will be an extremely negative signal to these new investors in the country, he feared.
The automobile industry is completely documented and is one of the top 3 contributors to government tax revenues. The industry’s contribution to national exchequer is expected to go beyond Rs 120 billion in the year 2018-19, he added.
The industry provides direct and indirect employment to 2.5 million Pakistani workers, technicians, engineers and management professionals. Upto 70 per cent of parts used in vehicles assembled in Pakistan are produced by domestic auto parts manufacturers who create 90% of employment in the auto sector.

The total sales of locally produced vehicles in 2017 were about 240,000 units. An additional volume of 80,000 used cars were also imported into the country during 2017. Auto industry of Pakistan needs to accelerate this volume to the critical size of 500,000 vehicles per year as soon as possible in order to attract more investment from outside of the country, particularly from foreign auto parts manufacturers, Aamir said.

Without development of auto parts industry, one cannot expect automobile assembly itself to be a “core Industry” in the country, similar to Korea, Thailand, Indonesia and India.
As a result of restriction of auto sales to non-filers, a large chunk of potential customers were excluded from purchasing automobiles. These included the entire agricultural sector, overseas Pakistanis and small businesses below tax threshold.

Since the restrictions were imposed in May 2018, bookings of automobiles, especially below 1000cc, declined by almost 40 per cent. Many of potential buyers for small cars, priced from Rs 700,000 to Rs 1,100,000, belong to rural areas and hence are not required to file returns being agricultural income earners.

It is anticipated the once in-hand bookings are delivered by December 2018, sales of automobiles will drop by 30-40 per cent depending on models. Consequently, demand for local auto parts will also drop drastically, forcing the auto parts manufacturers to start considering layoffs of 30 per cent workers in their respective industries.

The Government is the biggest beneficiary from the auto sector as it fetches an average of 32 per cent as various taxes from price of each automobile sold in the country. The slowdown in auto sales would have led to significant reduction in tax revenues creating a shortfall of almost Rs 40 billion in the current year, he anticipated. The auto sector has also been the biggest contributor to growth in Large Scale Manufacturing and national GDP.

He said it is the FBR’s responsibility to increase the tax net. However, it is neither fair nor wise to penalize any private industry such as automobiles by restricting their market size. The CNIC and other details of each auto buyer are provided by assemblers on a monthly basis to the FBR, which can hunt down any non-filers and prosecute them.
The following income tax exempt groups will be deprived of facility to purchase vehicles: Agriculture income persons not required to file returns. Families of overseas Pakistanis purchasing locally produced cars, widows with only inheritance as income and small business below threshold.

As vehicle sales drop due to a large segment not purchasing vehicles, government revenues will drop followed by rising unemployment parts making units, shelving of future investment plans by OEMS and rethinking about investment in Pakistan by new entrants.

He said the Industry should not be asked to enforce writ of government. Finally, it is against the law of the land to prohibit anyone from buying property or automobile, he added.

Published in Automark Magazine’s October-2018 printed edition

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