Tax exemptions trigger a rush of investment in car assembly plants

Motor vehicle assembly plants have started attracting foreign and local investment after the government announced a 50 percent tax exemption on components.

As of June 5 of the current fiscal year, Nepal has received foreign direct investment commitments worth Rs 1.15 billion from China to set up factories for electric two-wheelers and three-wheelers, the Ministry of Industries revealed.

The investment promises are for small and medium-sized industrial companies, which will create 479 jobs, according to the department’s statistics.

In March 2020, the government approved an investment of 10.54 billion rupees by South Korean automaker Motrex to set up a world-class manufacturing and assembly facility in the country.

The company intends to produce 50,000 passenger and commercial vehicles annually. 34,000 passenger cars, 15,000 SUVs and 1,000 commercial pickups will be produced. Production will begin with 5,820 units in the first year of operation.

The company will make 20 percent value addition while manufacturing vehicles in Nepal and provide most of the jobs to locals, according to the company’s proposal.

Apart from foreign investors, local investors are also showing interest in the car assembly industry.

According to the Ministry of Customs, six vehicle assembly companies with a total capital of Rs 6.83 billion have been registered with the Ministry of Industries in the current fiscal year. These factories will generate 1,083 jobs.

CG Automotive Industry, with a capital of Rs 1.31 billion, proposes to assemble 10,000 two-wheelers, 3,000 three-wheelers and 10,000 four-wheelers annually. 113 people will work in the company.

MAW Auto is spending Rs 1.51 billion on its plant, which will assemble 31,000 motorcycles and 19,000 scooters annually and employ 144 people.

SG Autocraft with total capital of Rs3 billion plans to manufacture 2,100 electric two-wheelers, 600 electric four-wheelers (cars/SUVs), 1,200 electric three-wheelers and 120 e-buses annually.

The company will also assemble internal combustion engines for two-wheelers, three-wheelers, four-wheelers and six-wheelers. Plans to release 10,500; 1500; 600; and 750 gasoline engines per year respectively. 431 people will work in the company.

E Bolt Mobility, with a capital of Rs 243 million, will manufacture 15,000 electric vehicles annually and employ 100 people.

Global Automobile will spend Rs 464.59 million on its factory, which will assemble 30,000 motorcycles and scooters and 5,000 auto rickshaws annually and create 150 jobs.

Dugar Auto Clinic has also entered the assembly industry and plans to produce 24,000 two-wheelers and 4,000 three-wheelers annually. It has a capital of 300 million rupees and will provide employment to 145 people.

STC Energy Industries will manufacture 600,000 units of various types of lead-acid batteries with an investment of Rs 530 million. The company will create 200 jobs.

The government’s revised budget for the current fiscal year provides for a 50 percent tax exemption on parts used by the two-wheeler assembly industry, up from the previous 25 percent.

The budget for the fiscal year 2022-23 provides for exemption from 50 percent excise duty and 25 percent import duty on spare parts or raw materials required for the manufacture of vehicles, if an industry for manufacturing or assembling four-wheelers is established in Nepal.

The budget for the upcoming fiscal year envisages levying only 1% duty on raw materials or spare parts used by factories manufacturing electric rickshaws, motorcycles or scooters.

Golchha Group and Jagadamba Group assemble Bajaj and TVS motorcycles in Nepal.

Dhurba Thapa, president of the Nepal Automobile Dealers Association, said many countries started as car assemblers before becoming manufacturers.

Thapa said stability in government policy was important or the capital invested by investors could be at risk.

“Vehicle assembly is not a productive sector. In fact, it is political corruption,” said Pawan Kumar Golyan, president of the Confederation of Banks and Financial Institutions, speaking at a recent function.

“Importing goods mostly in foreign currency and adding little value does not contribute to the national economy and job creation,” said Golyan, who also chairs NMB Bank and Golyan Group. It should have a value added of 30 percent.

“People running such factories are involved in political corruption,” Golyan told the Post. “We need a labor-intensive industry,” he said.

“It benefits certain merchants, not consumers and the nation,” Golyan said. “Investment should not be made in an industry like this that is made by political corruption.”

Golyan says the massive import and re-export of crude edible oil is another example of political corruption.

“Traffickers enter the ‘productive sector’ using a loophole and corrupt it.”

The power and influence of certain business houses at the policy-making level have diverted investment to such low-value-added manufacturing sectors instead of the real manufacturing sector, an insider said.

Thapa said the tax exemption on two-wheeler components has not led to a price differential between locally assembled and imported vehicles.

“There is no price difference between locally assembled and imported vehicles due to high operating costs in the initial years of the assembly plant and low production volume, but this will change and assembled vehicles will become cheaper in the coming days,” he said.

“The budget provisions for the upcoming fiscal year will allow the consumer to experience the price difference,” Thapa said.

“Investing in assembly plants is not a priority area for banks as there is no comparative advantage,” said Upendra Pudial, chairman of Nabil Bank. “Tourism, hydropower and some areas in the service sector have a comparative advantage.”

Poudyal said investments should be made in the real economy. “Vehicle assembly cannot be put into practice in the real economy,” he said. “Even if there’s 20 percent value added, that’s good for the economy in a way.”

Leave a Comment

Your email address will not be published.