ISLAMABAD: The Federal Board of Revenue (FBR) has projected an additional revenue gain of Rs7 billion following a proposed revision in sales tax rates on small vehicles, according to official sources.
Currently, locally manufactured or assembled vehicles with engine capacities up to 850cc are subject to a sales tax rate of 12.5%. However, under the Finance Bill 2025, the FBR has recommended eliminating this concessional rate and applying the standard sales tax rate of 18% across the board. This change would align the taxation of small cars with other categories of goods and help reduce distortions in the tax structure.
FBR officials have stated that this revision aims to rationalize the sales tax regime while addressing revenue shortfalls. The lower 12.5% rate was originally introduced to make small-engine vehicles, including hybrid models, more accessible to middle-income consumers. However, the FBR noted that this relief largely failed to reach the intended beneficiaries due to persistently high retail prices maintained by automobile manufacturers.
The FBR argues that although the policy was framed to support affordability, the actual impact on car buyers was minimal. With minimal price reductions passed on to consumers, the benefit of the reduced sales tax rate was not fully realized. Therefore, applying the standard 18% sales tax on such vehicles is now being pursued to ensure equity and revenue enhancement.
According to internal estimates, the adjustment in sales tax rates on motor vehicles alone is expected to contribute Rs7 billion to the national exchequer. The FBR maintains that this change is necessary to streamline the tax policy and eliminate preferential treatment that has failed to deliver.
This measure is part of broader reforms outlined in the Finance Bill 2025, through which the FBR seeks to widen the tax base, plug revenue leakages, and bring consistency in indirect tax policy, particularly in the auto sector.
