Académique Documents
Professionnel Documents
Culture Documents
i
C o N T E N T S
S. No Page #
ii
9- Research and Development Incentives 18
9.1 Eligibility Criteria 18
9.2 Eligible R & D Activity and Eligible R & D Project 19
9.3 Non-Eligible R & D Projects 19
9.4 Eligible R & D Expenditure 20
9.5 Assessment of Applications 20
9.6 Merit Criteria 20
9.6.1 Caliber of New R & D Activity to be Generated in Pakistan by ..... 21
Proposed Project
9.6.2 The Technical Merit of Proposed Projects 21
9.6.3 The Level of Benefit, Including Environmental Benefit to the 21
Wider Community of Proposed Projects
9.6.4 The Contribution of Proposed Projects to the Sustainability of 21
an Internationally Competitive Automotive Industry in Pakistan
9.7 Administration of the Scheme 22
9.8 Documentation 22
9.9 Claims for R & D Benefits 22
9.10 Monitoring and Review of R & D Scheme 23
9.11 Withdrawal of R & D Matchmaking Grants and Tax Incentives 23
9.12 Tax Incentives on R & D 24
9.13 Size of R & D Fund 24
10- Human Resource Development (HRD) 24
10.1 Factory School Concept 24
10.2 Incentives 24
10.3 Eligibility Criteria 25
10.4 Duration of Training 25
10.5 Approval of Curriculum 25
10.6 Administration of the Scheme 25
10.7 Business Plan 26
10.8 Documentation 26
10.9 Monitoring and Review of Factory School Scheme 27
10.10 Withdrawal of Incentives to the Factory Schools 27
11- Auto Clusters 27
12- Motor Vehicle Examination (MVE) 29
13- Emission Control Policy 30
14 - Road Network Programme 30
15- Safety, Standards and Accreditation 31
16- Used Vehicle and Components Import 32
17- Auto Sector Export 33
18- Auto Industry in Perspective of FTAs 34
19- Computerization of Vehicle Registration and driving licensing 34
20- Auto Industry Development Committee (AIDC) 35
CONCLUSION 37
iii
Draft Auto Industry Development Programme (AIDP)
The new phase of auto industry emerged during the year 2001-02 when
the auto industry entered into a rapid growth phase. The rapid growth has been
triggered by a regular high growth in economy, increase in the purchasing power
of consumers and availability of credit and financial options coupled with low
interest rates. The growth in demand surpassed supply, particularly in the
Motorbike, Car and Tractor sectors. To overcome demand-supply gap
Government had to allow used car imports by relaxing the rules permitting such
imports. Despite a production of 160,642 cars by the close of 2005-06 and
import of 48,692 cars including 43,295 used cars, supply side has improved to
some degree but the gap still exist.
Production of Vehicles
(No. of Units)
2001-02 2002-03 2003-04 2004-05 2005-06
CARS 40,088 62,073 98,461 126,403 160,642
TRUCKS 1,134 1,929 2,022 3,204 4,518
BUSES 1,086 1,296 1,380 1,762 825
LCV 9,055 12,548 14,896 25,177 32,053
FARM TRACTOR 23,801 26,240 35,770 43,200 48,887
MOTORCYCLE 120,627 175,169 371,007 570,085 751,667
TOTAL: 195,791 279,255 523,536 769,831 998,592
Major growth drivers of Auto Industry were the car/ LCV, Tractors and the
Motorcycles. The Auto Industry products expressed compounded growth rate of
50%, during last five years, out of which the cars registered 41%, Motorcycles
58%, LCVs 37%, Buses (-7%), Trucks 41%, and Tractors 20%.
Pakistan Auto Industry, during the rapid growth phase achieved rapid
localization through adoption of Deletion Programmes (1985 to 2005-06).
Regulatory mechanism for the Deletion Programmes in the form of Industry
Specific Deletion Programmes (ISDP) played their part. ISDP’s mandated
compulsory local content targets for each model of a vehicle through allocation of
certain indices (points) to the components. An assembler had to choose
components from the basket to meet its deletion targets fixed for that year. The
Auto Industry localized most of the sheet metal parts, plastics & rubber parts and
aluminum parts such as radiators, wire harnesses, chassis, tyres & tubes, wheel
& rims, interior TRIMs, car seats and lights etc.
1- CURRENT STATUS
industry owns TBS. TBS discourages Rollback of locally developed parts and
components and provides an inducement to the industry on further localization.
This has led to a transparent, predictable and a competitive environment based
on higher rate of duty on the import of localized parts and components.
Auto Industry is volume driven industry and a certain critical mass is a pre-
requisite for attracting the much needed investment in certain sub-sectors of the
industry. Pakistan Auto Industry is fast approaching to that level and as the
numbers grow, investment in manufacturing certain critical components would
become more viable.
Auto Industry due to its multiplier affect and strong backward (materials
such as steel, copper, aluminum etc., plastics, glass, paint, electronics, capital
equipment, trucking, warehousing & logistics) and forward linkages (dealerships,
credit & financing, logistics, advertising, repair & maintenance, petroleum
products, goods stations, insurance, service parts), is considered, world over, as
the key industry.
The job multiplier in Auto Industry is high, the ratio of employment in the
OEM to vendors is nearly 1 : 10 in Pakistan. A total of 192,000 direct jobs have
been created in the sector. Likewise the ratio of direct employment in the Auto
Industry to jobs created outside the vending and OEM sector would safely be
1 : 12
Despite an impressive growth in auto sector during the last 5 years, trade
deficit in the Auto Industry is whooping and a source of major worry for the
Government. Total exports were to the value of US$ 35 million only during 2005-
06, against the import of US$ 1,115 million (including CBU imports).
The industry is working under high protection tariff due to which the
business environment has been competition free. Market is monopolized by few
OEMs, and the products are characterized by relatively low quality, high priced
fewer models, long delivery times and poor service to the customers.
Recognized auto parts suppliers would not be more than 300 and are placed
mainly in and around Lahore and Karachi. They are mostly small and medium
enterprises and are fragmented. Most of the vendors are new business entities
who have limited financial capacity, low manufacturing base, know how and
skills, poor technology levels, and lack the vision to transform the existing levels
despite huge potential in the sector. Most of the vendors are vulnerable to
business shocks in the TBS environment as their price competitiveness, terms of
supply and quality would now be challenged by the OEMs.
The recent rapid growth phase has challenged the quality and safety
standards, emission controls, roads and parking infrastructure, which is far from
satisfactory.
AIDP aims at doubling the contribution of auto industry to GDP and its
turnover to 600 billion rupees in the next five years and reaching to an export
level of US$ 350 million for components mostly to the international after market
and to the OEMs. Motorcycles, tractors and cars are expected to identify
markets for themselves, thus raising export potential to US $ 300 million by the
year 2011-12.
The Auto Industry in Pakistan does not produce critical components such
as engine parts, transmission and gearing, as the volume of cars is less than
what actually is needed for such manufacturing. However, the vendors are
supplying forgings and castings, certain machined parts, sheet metal, plastic and
rubber parts, chassis assembly, fuel tanks and certain electrical components.
The low motorization at the existing level of 8 cars per 1000 persons and a
huge potential for the Auto Industry to grow supported by market oriented and
deregulated Government policies, suitable macro economic environment, credit
& financial options and regular increase in disposable income of the consumers,
the industry needs to exploit this potential through supply of high quality,
competitively priced innovative products with high safety, environment friendly
and consumer satisfying features.
The industry is operating under high import tariffs both for CBU and
CKD’s. Deletion Programmes ensured purchasing of parts manufactured by
vendors, as the violation by OEMs would result into penalty at the rate applicable
to import of CBU’s. The environment has been non-competitive, relatively non-
transparent and was inhibitor rather than promoter of efficiency on a long term
base.
The successor system i.e. Tariff Based System on the other hand gives an
option to the OEMs to import certain components or buy them locally purely
based on economic principles. This system certainly promotes competition in the
vending sector and drives them to provide right quality, price and in time
deliveries. Vendors except few may face difficulty in making quick adjustment to
this system. TBS on the other hand has created plus 400 tariff lines for the parts
and components for the Auto Sector which nearly covers 6% of total tariff lines.
This would remain a major challenge for the Government negotiators on how to
gain or provide market access to the partner countries in future FTAs. Final
outcome of NAMA negotiations may also catch industry unaware.
Certainly there has to be a phased reduction of tariffs for the high tariff
rates of localized items. It would be more appropriate if the tariffs come down by
at least 15 percentage points for the localized components, within next five years
but still remaining higher than CKD tariffs for non-localized components.
Import tariffs on CBU’s is high and the total incidence of duty/ taxes i.e. by
adding sales tax, withholding tax and CVT on compounded bases — leads to
high protection. Removal of water from existing tariff structure and unification of
tariff slabs on different engine capacity cars will lead to simple, competitive and
yet reasonably protected tariffs for the industry. At such levels industry would not
be at risk to have influx of new cars.
Following reduction of tariff is proposed for the next five years.
2.1 Five Year Tariff Plan for Vendors / Manufacturers of Parts / Components
2006-07 2007-08 2008-09 2009-10 2010-11
Vendors Raw Material 0% → → → →
(Manufacturers of Sub-Components 5% → → → →
parts/components) Components 10% → → → →
This is proposed that import duty on CBU cars may not be further lowered,
Relatively high CBU tariff encourage investment in the auto sector, components
manufacturing, job creation and exports.
5.1 Definition
New Entrant means a potential assembler/ manufacturer of Car/LCV who
has no direct or indirect relationship with the present assembler/ manufacturer
and had never undertook assembly/ manufacturing of cars/LCV’s in Pakistan in
the past. The New Entrant may fulfill the eligibility criteria under these rules.
5.2 Eligibility Criteria
i) Companies producing more that 500,000 units of Cars/LCV’s
annually in countries other than Pakistan.
ii) The New Entrant has serious and significant global presence in auto
manufacturing.
iii) Present Car/LCV manufacturers/ assemblers will not qualify as New
Entrant even for their new models.
iv) Registration to produce road worthy Cars/LCV’s, with the
Engineering Development Board, Ministry of Industries, Production &
Special Initiatives.
v) Production of at least 10,000 Cars/LCV’s on one standardized
platform in the first year of production.
vi) Proof of land acquisition in the case of a green field project or an
agreement with the owner, in the case of existing assembly
facilities.
vii) Complete in-house assembly/manufacturing facilities as provided in
SRO 656 (I) 2006 dated 22-6-2006.
Assembly of cars / LCVs from the imported SKD (semi knocked down) kit would
be considered contrary to this policy and the benefits under this policy will not be
admissible.
5.3 Benefits
New Entrants will be allowed to import 100% CKD kit/ components, at
leviable customs duty applicable to the import of components not manufactured
locally, for a period of three years from the start of assembly/manufacturing.
5.4 Business Plan
A qualifying New Entrant will be required to submit a business plan to
demonstrate whether and to which extent:-
i) Total unit production will increase substantially in a period of three
years from the commencement of production.
ii) International competitiveness will be achieved, and of steps to be
undertaken for the purpose.
iii) The human resource will be developed through extensive training.
iv) Acquisition and improvement of technology will be undertaken.
v) The assembly / manufacturing will lead to creation of jobs, including
retail sales, aftermarket, repairs and service facilities etc.
vi) Local content in the assembly / manufacturing operations will
increase gradually.
vii) EURO-II compliant environment friendly cars/ LCV’s will be
produced, besides conforming to other national standards.
The Auto Industry particularly the vending sector is facing serious capacity
constraints and there are fears that OEMs, in post deletion programme scenario
may shift part of their procurement to the overseas suppliers, on price, quality
and timely supply issues.
The only way out is to increase the capacities through massive investment
which may lead to the tune of 140 to 150 billion rupees in the next five years.
There is need that Government may introduce some innovative approach to
attract and facilitate such investment and to create an environment which is risk
free for the vendors and which could encourage interdependencies between
OEMs and Vendors for the sustainable development of vending sector.
The benefits of this scheme would be allowed to the vendors and OEM’s
with the following objectives:-
i) To expand and modernize capacities in vending sector.
ii) To encourage localization of components for the local production of
vehicles and for export.
iii) To encourage rationalization of platforms by the OEMs.
iv) To encourage development of critical components and economies of
scale for global supply.
v) To promote interdependence between OEM’s and vendors.
Vendors will be allowed to sell their PAII certificates and duty credits
thereof to only those OEMs who have rationalized their platforms. Rationalization
of platforms has the objective to reduce the proliferation of light motor vehicle
models, produced in the country at an annual quantity of not less than 30,000
units.
A vendor will submit an application to the EDB to get the permission to sell
PAII certificate to the OEM. The application will indicate the following;
For the release of ongoing PAII certificates (i.e. the balance of certificates
after the first year’s 5% of claimed capitalized investment) subsequent claims
must be submitted. The subsequent claims must have the following detailed
information.
The level of technology in the vending sector is low mainly due to the high
cost of technology acquisition. Most of the vending entities are still adopting the
primitive ways of manufacturing despite high growth in the Auto Industry. With
such technology level, competitive production at high volumes and entering into
export markets looks a daunting task for the vendors. In order to overcome
technology shortages, a Technology Acquisition Fund (TAF) is proposed.
The followings are not eligible for tax concessions or match making grants
of an eligible R&D project
EDB will verify whether the proposed projects are eligible R&D projects.
An auto Industry Development Committee (the assessment panel), will provide
recommendations to the EDB including:
The EDB will have the final decision in determining which projects will
receive credits under the scheme and will consider the factors including;
9.8 Documentation
EDB, based on fulfilling all the qualifying criteria and the merit criteria of
the assessment panel of AIDC, and after due diligence and verification by its
experts, will recommend the case for disbursement of matching grant to the
Ministry of Science & Technology.
EDB reserves the right to withdraw the R & D matching grants and tax
concessions / incentives availed with retrospective effect for non-performance by
the claimant. If any irregularities have been observed or incorrect information
was furnished with regards to the obtaining or utilization of the match making
grants / tax incentives pending the outcome of any civil, legal or criminal
proceedings against the claimant. In such an event, if claimant or beneficiary is
being deregistered or if the unutilized portion of a grant / tax concessions is
An entity qualifying for R&D claims and as recommended by the EDB and
AIDC will be entitled to 100% deduction on expenditure on in-house R&D
facilities.
The skill level in Auto Industry and more so in the vending sector is
dismally low and disappointing. OEMs however, entail in-house training both at
worker and managerial levels. Skilled human resource, nevertheless is of huge
significance in the Auto Industry for which Government is proposed to establish
Auto Engineering Departments in the Universities and the Poly Technical
Institutes. However, for on job training for the students, Government may
consider attachment of such institutes to some accredited auto-engineering units
for training at the shop floor.
10.2 Incentives
Tax incentives in the form of deductions equivalent to 125% of the net
expenses (total expenses – revenue (factory school) × 1.25) from the annual
taxable income of such entities operating Factory Schools for the in-house
training of its management, supervisors & workers and for the rest of Auto
Industry including vendors.
ii) Tax incentives will be linked to the quantity and quality of trainees
produced, content of the courses, assessment of classrooms, practice
areas, laboratories, quality and number of automotive instructors with
certain benchmarked credentials. The incentives would also be linked
to the assessment, as to what extent the cutting edge technology
exposure was provided to the students.
iii) The major areas of training will include product designing, production
processes, enterprise research & planning, improving technology
processes, supply chain management, shop floor management, quality
testing and standardization, cutting the wastages, complementation of
processes, inventory management, customer education, innovation
concepts and overall efficiency improvement. Curricula will also
include the safety and security of personnel, equipment and
environment.
10.8 Documentation
i) The owner of such facilities (Factory School) will submit claims on the
prescribed format for the tax incentives based on the training imparted
during a financial year. The application will be duly supported by the
financial statements including the income statement and balance sheet
of the relevant year and the previous three years. The declaration on
the last page of application must be signed by an authorized Director
of the company.
iii) The management of such schools will also submit details of trainees
qualified in that financial year. This will also include the break up of
trainees i.e. from within the entity and from the rest of auto industry.
AIDC will monitor and review the Factory School Scheme, its
contribution to the competitive development of Auto Industry through
improvement in the quality and quantity of human resource, economical viability
improvement and accreditation issues every year for unto five years. The
assessment will also be made to see the effectiveness of the scheme, any
bottlenecks and constraints in the smooth running of such Factory Schools and
will recommend measures to further improve and enhance the scope and
efficiency wherever necessary.
EDB reserves the right to disapprove and withdraw the tax incentives
recommended, with retrospective effect due to non-satisfactory performance of
such schools or the misuse of tax incentives, based on the AIDC
recommendations. Likewise, if any irregularities have been observed or incorrect
information was furnished with regards to obtaining or utilization of tax incentives
pending the outcome of any civil, legal or criminal proceedings against the
claimant, in such an event, if claimant or beneficiary is being deregistered or if
any tax concession is withdrawn in terms of this paragraph, any benefit obtained
as a result of such scheme shall become repayable on demand to the
Government.
11- AUTO CLUSTERS
The vendors are fragmented and no complementation takes place in the sector.
Component sector lacks sophisticated manufacturing processes which otherwise
could have been strengthened through mutual support, had there been
recognized clusters. Country needs at least two clusters or automotive parks.
There is a dire need to develop such clusters to achieve 0.5 million car
production target by 2011-12. Auto Clusters will bring together the competencies
of its members along with the supply chain and will act as platform for
technological innovations, national and international cooperation, consultancy,
training, marketing and distribution. Clusters also enhance the development of
efficient communication among its members. It enhances all activities connected
with the research and development of new products and services with greater
added value. Clusters provide important links between members, supporting
synergy with suppliers of machines, tools, manufacturing, design, logistics and
other services.
Gear Box /
Transmission 250,000 nos 5,000 nos 255,000 nos 10 Acres 2 20
1,545,000
Axle 1,500,000 nos 45,000 nos nos 10 Acres 2 20
Suspension /
Mcpherson struts 10 Acres 2 20
Steering / Power
steering
Assemblies 10 Acres 2 20
For an auto cluster having around 280 companies along with a common
training institute, testing and certification centers, designing and styling centers,
residential accommodation for workers and other facilities, a total of 1,200 acres
would be required for each cluster. Each of such clusters is expected to generate
around 35,000 - 40, 000 direct jobs and many indirect jobs in the warehousing,
logistics, material supplies etc.
MVE in its present form is highly deplorable as the MVE Inspectors are
neither properly equipped nor they are skilled to examine vehicles due to which a
large number of auto population in the country is un-road worthy. This has
resulted into high rate of accidents on roads and high mortality ratio than
anywhere in the competing countries. While for the efficient development of Auto
Industry, Government needs to strengthen MVE by undertaking large investment
in their equipment, infrastructure and remuneration package besides entrusting
this responsibility to a company formed in the private- public partnership or to a
private entity.
This is believed that old vehicles are the gross polluters and can
contribute up to 80% of the pollution load in the major cities. The new vehicles
with efficient technologies even deteriorate rapidly if not maintained properly.
Besides used car imports, liberal baggage rules led to high import of
buses and trucks. Bus sector has registered negative growth (-7%) during last
five years despite this period of buoyant growth. This also badly affected the bus
body building sector. Besides used imports, regulated fares for inter and intra city
routes is another factor.
Import of used dump trucks and concrete mixers has hurt truck
assemblers adversely. Bus/truck assemblers have been utilizing only 19% of
their production capacity due to these misdirected policies and poor controls by
regulators.
Used vehicle import would not benefit the consumer or the industry and
Government should rather make its long term policy on this issue, which may
include strict implementation of Transfer of Residence (TR) and Baggage Rules
with compulsory registration of vehicles in the name of returning Pakistanis, for at
least one year. Under TR rules, vehicles may only be allowed if these are
registered in the name of importer for at least one year in the country of
residence.
National standards may be developed for the car, bus, trucks and tractors
which may strictly be applied to used vehicle imports. Efficient testing facilities
may be established at the ports and within the cities, for this purpose.
Amongst the important factors for dismally low exports are low assembly
and components manufacturing capacity and high local demand which remains
unmet by around 20%. Export surplus can only be achieved through high
investments in productive capacities, bringing more technology and innovations,
developing high value added critical components and the existing assemblers
making supplies to their regional hubs.
This is feared that in the coming years trade deficit in auto sector will
further increase warranting Government to tighten, the liberal used car import
schemes.
amount of indirect taxes paid by the assemblers directly and by their vendors
which comes to around 12 – 13% of FOB is proposed to be refunded to them.
This is anticipated that R & D fund would facilitate in re-designing / styling certain
parts such as fuel tanks, seats, lights, handle, etc.
To have a critical export surplus, the auto sector policies which are in
place need to be revisited such as used car/ bus or truck imports under baggage
scheme and zero import tariffs on agricultural tractors.
Auto industry may remain in highly sensitive list mainly due to the factors
that it is in the development stage, high jobs are at stake and that industry will
enter into export market in next 2 – 3 years.
AIDC will have the mandate to provide its findings to EDB after making
necessary documentary verifications, reviewing inspectors reports or through
personal hearings or by any other means on the claims for the benefits under
various incentives proposed in the AIDP. Such incentives include productive
asset investment allowance, technology acquisition fund, R&D, Human Resource
Development and other incentives.
AIDC will provide a vision for the auto development and will continue
reviewing the progress, effectiveness of incentive regime and to propose
corrections and improvements in the AIDP wherever necessary.
Composition of AIDC
1. Vice Chairman/ Chief Executive Officer, Chairman,
Engineering Development Board AIDC
2. General Manager (Policy Development), Secretary
Engineering Development Board
3. Joint Secretary, M/o Industries, Production & Special Initiatives Member
4. Joint Secretary, M/o Science & Technology Member
5. Joint Secretary, M/o Commerce Member
6 Joint Secretary, M/o Environment Member
7. Chief Customs (Tariff & Trade), Central Board Member
of Revenues
8 One private sector Economist (preferably having experience in Member
Policy Development in Industrial economics).
9. One private sector qualified chartered accountant. Member
10. Vice Chancellor, University of Engineering & Technology, Member
Lahore or his representative.
11. Vice Chancellor, NED University, Karachi or his Member
Representative.
12. Vice Chancellor, GIK or his representative. Member
13-14. Two experts from Private Sector. Preference would be given to Member
those experts who have been working with Auto Industry
during the last 5-10 years. They should have consultancy
experience with sound background of tariff, management and
knowledge on the fundamentals of industry.
15. Managing Director, Pakistan Standards and Quality Control Member
Authority (PSQCA) or his representative.
16. Chairman, PAAPAM Member
17. Vice Chairman PAAPAM Member
18. Chairman, PAMA Member
19. A Representative of Car Assemblers on rotation basis for one Member
year (out of three leading assemblers).
20. A Representative of Motorcycle/tri-wheeler Sector on rotation Member
basis for one year (out of five leading assemblers).
21. A Representative of Tractor Assemblers on rotation basis for Member
one year (out of two leading assemblers).
22. A Representative from Truck/Bus Sector on rotation basis for Member
one year (out of three leading assemblers).
AIDC will meet at least once a month or as and when convened by the
Chairman, AIDC. AIDC would be empowered to constitute various sub-
committees from its members on need basis.
CONCLUSION
*******