FBR rejects proposal for 18% sales tax on cars

Sources within the FBR suggest that the extent of the fraud could be even higher than the reported Rs 53 billion, a matter that can be ascertained during a comprehensive investigation. photo: AFP

Islamabad:

The Federal Board of Revenue (FBR) has rejected a proposal by the Industries Ministry that sought to impose a general sales tax (GST) of 18% on locally made cars, saying it will also lead to a reduction in tax collection. as a loss of revenue.

The Directorate of Industries and Production has been asked to provide its opinion on streamlining the criterion for imposing 25% sales tax on locally manufactured and assembled vehicles by avoiding undermining of the tax base by ensuring that no car variant and model is subject to a lower tax rate than the one in force today.

In response, the Department of Industries and Production, at a recent meeting of the Economic Coordination Committee (ECC), proposed to apply an 18% sales tax to all local car manufacturers and assemblers without any discrimination. However, it recommended that the sales tax on cars under 1,400cc not be increased.

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

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

He told the meeting that considering the unprecedented fiscal and current account challenges and the immediate need to allocate resources to stabilize the economy, the luxury goods sales tax, which was previously charged at the normal rate (17% ), increased to 25%. ad valorem in March 2023.

The enhanced sales tax was also applicable to locally manufactured and assembled double cab vehicles.

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

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The FBR pointed out that the 25% sales tax on SUVs/CUVs, as a class of goods, created an imbalance in the market for vehicles below 1,400cc engine displacement, making them uncompetitive with sedan cars of similar capacity. He emphasized that SUVs/CUVs should be given a level playing field and to address the anomaly, a summary was sent to the Cabinet Committee on Legislative Change (CCLC) on August 3, 2023, proposing that all locally manufactured vehicles priced above 5 million Rs. (no sales tax), regardless of engine displacement or cabin, subject to 25% sales tax.

Another summary was sent on December 20, 2023, incorporating the views of the Directorate of Industries and Production and proposing 25% VAT on all locally manufactured vehicles with an invoice price of more than Rs 35 million (excluding sales tax).

It was pointed out that the proposed price benchmark was reduced from Rs 5 million as some of the vehicles, currently subject to 25% sales tax, were priced below Rs 5 million.

The CCLC considered the matter and its decision was endorsed by the federal cabinet. The CCLC did not agree with the FBR’s proposal and asked it to refer the matter to the cabinet after a thorough internal review.

Therefore, the matter was reconsidered and it was proposed to retain the 1,400 cc engine displacement condition. to ensure the tax base.

However, to provide a level playing field to all luxury vehicles, it has been proposed to implement as an additional criterion for levying sales tax at an enhanced rate of 25% a reference price of Rs 4 million (excluding sales tax).

As a result, vehicles below 1,400cc and priced below Rs 4 million would attract the standard tax rate of 18%. It was pointed out that all locally manufactured and assembled vehicles below 850cc will continue to be subject to the reduced tax rate of 12.5%.

Similarly, hybrid electric vehicles will enjoy reduced tax rates provided in the Eighth Schedule of the Sales Tax Act, 1990. The estimated annual revenue impact of the proposal will be Rs 4.5 billion.

Published in The Express Tribune, March 5^u2024.

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