The death of the refurbished Japanese car

For a while, it looked like Pakistanis might have found a way out of the clutches of the Big Three car manufacturers. Toyota, Honda, and Suzuki have had an iron grip on Pakistan’s car manufacturing industry for decades, despite producing cars with dodgy quality, producing the same few models, and giving no room to competition. 

However, around a decade ago, the country saw an increase of refurbished cars being imported from Japan. These cars were mostly from the same three companies, though they included some brands not manufactured in Pakistan like Toyota’s Daihatsu, with the only difference being that before coming to Pakistan they had been driven in Japan. These second hand cars were so far superior to the vehicles being produced in Pakistan that a significant chunk of the market shifted to them.

While most people remained hooked on the domestic production of the Big Three, imported Japanese cars became all the rage. Now, however, with the incumbent government’s pro-export and anti-import policies, importing cars has come to a grinding halt. Here is why. 

How the business works 

Here is how the business of importing vehicles from Japan started out several decades ago. Around that time, the government had introduced a policy to facilitate overseas Pakistanis so that they would be able to bring over their vehicles from other countries. In theory, the cars being imported into Pakistan were simply for returning expatriate Pakistanis being allowed to bring their own cars back home.

Since these were to be used vehicles and not brand new ones, the duty on them was much lower irrespective of brand and variation. Locally, or when a brand new car is imported, the tax is determined by how high-end the car is. Under this policy, even the fanciest of cars could be imported at the same duty meaning they would be cheaper in Pakistan. 

People saw this as an opportunity and earmarked Japan as the country to target because it has the kind of cars that Pakistanis like, and is home to brands like Toyota, Honda, and Suzuki that Pakistani consumers are used to. However, going to Japan every month and buying cars at an auction is difficult, and importing them even more so. Which is why prospective importers contacted Pakistanis settled in Japan, and asked them to buy and ship the cars on their behalf for which they would pay them a fee. The overseas Pakistanis get a neat easy sum for signing some papers, and importers get next to duty free cars to sell on the Pakistani market. 

So, importers started buying old cars at auctions through these proxy buyers. These are cars that had been damaged beyond repair sometimes or were company cars. They would get these vehicles cheap and then send them to Pakistan with a low duty on them. This would be done on the back of some overseas Pakistani, and then locals in Pakistan would buy these auction cars in bulk and sell them. 

The damaged and old cars would then be fixed and refurbished in Pakistan, resulting in an entire auto repair and parts import industry springing around these vehicles. These imported cars usually have more features, more safety assurances, and are a better drive and offer better mileage than local cars despite their bad days in Japan. For the first time, Pakistanis could buy cars that had features like central locking, power steering, and reversing cameras without having to buy the top of the line cars, at the price of middle range sedans and hatchbacks. Hybrid models became available as well, and all Japanese cars have automatic transmission – something only the best and most expensive locally manufactured cars have. Because of all of this, the market quickly became a threat to the big three. 

Of course, the entire used cars market was built on a lie to some extent, since it was exploiting a loophole in the policy meant to benefit overseas Pakistanis. Now, when the government wanted to curtail these imports, this policy was what they reformed. Under it, Importers now needed an FRC or Foreign Currency Remittance Certificate from a local bank with a verified source of origin of payments to be able to import a vehicle. 

Other than this, The duty and taxes for the vehicle being imported are now to be remitted from the account of the same Pakistani who is importing the vehicle into Pakistan using his Passport, and the remittance for taxes is to be received in the local bank accounts of the same Pakistani who is moving back to Pakistan or at any of his family member’s accounts.

Essentially, earlier, importers had a contact living in Japan that would buy the car, and then ship it to Pakistan for a fee and the importers would take care of the rest. Now, under the new policy, the overseas Pakistani has to not only buy the car, but pay the duty from Japan himself before exporting the car, have a bank account in Pakistan, and come there to receive the car. The importers cannot regularly travel to Japan themselves because of visa issues, and the contacts they have there are settled in Japan, which means they cannot keep travelling back and forth either, making the business next to impossible.

What is happening now

The amendments made in the policy have resulted in fewer cars coming into Pakistan and the ones that do make it through becoming very expensive. The latest situation is that other parts of the proceeds realisation certificates (PRC) policy have been implemented and the result has been that vehicle prices have gone up dramatically instead of down.

Muhammad Hussain is a resident of Sheikhupura and his brother had been working in Japan for some time. Hussain took advantage of the opportunity and recently imported a car from Japan with the help of his brother and is now deeply disappointed that the government’s new policy on car imports has put him in a difficult position and if he had bought the car from the local market instead of importing it, he would have had to spend only a few thousand rupees extra.

“When my brother booked a car for me from Japan and sent it to Pakistan, we learned that the government had changed its policy on importing cars. In other words, in the past, the person who imported the vehicle used to pay the customs duty, but now the person who sends the vehicle from outside will pay the customs duty from his account,” he explains. “We had a hard time with this government policy because my brother did not have enough money to pay the customs duty so we sent him money from Pakistan and then he sent money from his account to Pakistan Customs for clearance.” 

“The story does not end here, because it took us two months to clear customs even after the payment of customs duty. One excuse for not clearing our vehicle was the non-transfer of funds from the IBAN account but the government withdrew that clause and our money transfer method was accepted after a month because Japan does not even have an IBAN system and money is transferred from there through soft code.”

Traders who import cars into Punjab’s markets believe that car prices in Pakistan have been rising sharply for the past two years and if compare the last few years with the current price of cars, it has increased by 60 to 70 percent. Importers also believe that since the government changed its vehicle import policy, it has not only reduced the number of imported vehicles but also increased their prices drastically.

Mohsin Ali trades in imported vehicles in the Johar Town area of ​​Lahore, and also imports vehicles from other countries. Speaking to Profit, he expressed concern over the current import policy and the situation arising out of it. “The government’s new policy on car imports has undoubtedly severely damaged the car business. The Japanese car, which was priced at RS 1.2 million two years ago, is now worth more than RS 2 million. Where the prices of vehicles have gone up, the import of vehicles has also come down sharply and the government has not been able to earn much income in terms of customs duties on imported vehicles.” 

“If we look at the official statistics, in 2018, Pakistan imported 90,000 vehicles and the government received RS 90 billion in customs duties. While only 15,000 vehicles have been imported this year and the government has received only RS 15 billion in customs duties. The shortage of imported vehicles has also affected the local market and on December 2nd, all the local companies have increased the price of their vehicles by about RS 100,000. Obviously, when a good car is not available in the market, the competition will decrease and the demand for local cars will also increase. If imported cars were plentiful in the market, local companies would not even think of raising the price of cars,” he explained.

However, the problem again is that the government feels these cars are only being imported because people are making it out to be that they are being sent from Japan as an item sent for personal use, not for commercial services, which is what most importers do – import in bulk and sell the cars at showrooms. Another car dealer from Lahore, Sajid Azaz, informed Profit that there was no policy to import cars for business purposes in Pakistan.

“There are only three levels in which any car can come from outside Pakistan. In one category, if you are moving from another country to Pakistan, i.e. changing country of residence, you can bring a car. In the second category, if you are not a resident of another country but have spent two years in another within the last three years, you can bring a vehicle to Pakistan as your personal belongings. The third and final category is that you live in another country but you can send a car as a gift to one of your close relatives in Pakistan.”

Meanwhile, a senior official of the FBR also confirmed that vehicles cannot be imported for commercial use and can only be used for personal use. “When people order vehicles from outside, all the legal documents are there and they fulfill all the requirements of the law. These people are also paying customs duty on the car and the car is theirs after coming to Pakistan and if they want to sell it, how can anyone stop them? According to the law, a person can send only one vehicle to Pakistan in a period of two years and this law is being implemented.”

Osman Khan, another Lahore-based car dealer, told Profit the details that make it easier to understand how the business of imported cars is booming in Pakistan due to the lack of a formal policy and now what are the real reasons for the price hike and what are the factors that determine these prices. According to Khan, the business of imported cars in Pakistan is not really legal in the same way as the local new or used cars. It is as if all the legal requirements are met for importing a vehicle, even though it is for commercial purposes. It is within the letter of the law, even if it isn’t within the spirit of the law. 

“The new PRC policy by the government has undoubtedly disrupted our business system and it is not benefiting anyone, neither the government nor ours. On the contrary, the government has lost a major source of revenue,” he said. “The PTI government had implemented the PRC policy last year. The PRC is simply a document in which the sender of the vehicle from abroad will also send the customs money to Pakistan from his personal account and a certificate of this will be issued by the National Bank.”

“The problem is that if an imported vehicle is worth RS 1.6 million or more than 10,000 dollars, it is not easy for the sender to transfer money from abroad to Pakistan because by doing so, you will come to the notice of the government there. The government had made this policy only to bring dollars to Pakistan from abroad but this is not happening. People who are ordering vehicles for commercial use also send the amount of customs duty from here to the car senders and the same amount is sent back to Pakistan in the form of customs duty from the car sender’s account. The government has not benefited in the slightest, but the person ordering the car has to spend extra on remittances, which has a direct impact on the price of the car,” Khan added.