An unexpected rise in the withholding tax has triggered a sharp 36% month-over-month decline in vehicle sales, signaling potential challenges ahead for the automotive industry, reports WealthPK.

In July 2024, Pakistan’s automotive industry witnessed a mixed performance across various segments. According to the data from the Pakistan Automotive Manufacturers Association (PAMA), sales of cars, SUVs, pickups, and vans stood at 8,589 units, reflecting a 60% year-on-year increase but a significant 36% decline month-on-month. The sharp drop in sales is largely attributed to the hike in withholding tax rates introduced in the FY25 budget, which had triggered a surge in pre-buying activity in June, pushing sales to an 18-month high.

While Toyota, Honda, and Suzuki saw varied performances across their models, with some experiencing growth and others declining, the overall industry faced challenges, including reduced sales due to increased costs and tax burdens. Additionally, tractor sales plummeted following the imposition of a 10% general sales tax (GST), while the two- and three-wheeler segments showed resilience with a 15% year-on-year increase. 

The mixed results underline the complex dynamics at play in Pakistan’s automotive market, with tax policy changes significantly influencing consumer behaviour and sales outcomes.

“The withholding tax increase creates a significant barrier for consumers, particularly in a market where disposable incomes are already stretched. The auto industry is a critical component of Pakistan’s industrial base, and such a decline in sales could lead to a contraction in economic activity,” said a representative of PAMA, who wished to remain anonymous. 

“Additionally, this downturn will likely affect the entire supply chain, from parts manufacturers to dealers, and could result in significant job losses if not addressed promptly. The government needs to strike a balance between revenue generation and supporting key industries,” he said, adding that a more nuanced approach, perhaps through targeted tax relief for buyers or low-income groups, could help mitigate the impact while still achieving fiscal objectives.

The government increased the withholding tax on vehicle purchases in an attempt to boost revenue amid a challenging economic climate. However, the move appears to have the opposite effect, dampening consumer demand in an already struggling market. Automotive dealers report a significant slowdown in sales, with many prospective buyers postponing or cancelling their purchases due to the increased cost burden.