ISLAMABAD: In a move to generate revenue and discourage the use of non-essential and luxury items, the Federal Board of Revenue (FBR) in Pakistan has notified a 25 percent sales tax on motor vehicles.
The decision, outlined in SRO 370(I)/2024 dated March 8, 2024, amends the previous SRO 297(I)/2023 dated March 8, 2023, introducing new sales tax rates on specific categories of motor vehicles.
Traditionally, the standard rate of sales tax in Pakistan is 18 percent. However, the government’s attempt to boost revenue has led to an increase in the sales tax rate to 25 percent on certain categories of motor vehicles. The new notification specifies that the higher sales tax rate of 25 percent will be imposed on the following:
1. Locally manufactured or assembled vehicles with an engine capacity of 1400CC and above under PCT Code 87.03.
2. Locally manufactured or assembled vehicles with an invoice price (excluding sales tax) exceeding Rs 4 million under PCT 87.03.
3. Locally manufactured or assembled double cabin (4X4) pick-up vehicles under PCT 87.04.
The Economic Coordination Committee (ECC) of the Cabinet has given its approval for the increase in the General Sales Tax (GST) to 25 percent on locally produced vehicles with an engine capacity of 1,400cc and above. However, concerns have arisen within the automotive industry regarding the potential repercussions of this decision.
The Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) has voiced serious reservations about the proposed hike in the sales tax on motor cars from 18 percent to 25 percent. PAAPAM leadership, including Chairman Abdul Rahman Aizaz, SCV Mumsahd Ali, and VC Taufique Sherwani, collectively expressed apprehension about the consequences of such a tax increase.
The association warns that this move could lead to a significant escalation in car prices, possibly reaching Rs 4 million or more. The leaders argue that the previous increase in sales tax to 25 percent on 1400 cc cars, combined with other taxation measures and the devaluation of the rupee, has already resulted in a drastic drop in automobile sales, plummeting to just 30% of the levels seen in 2021-22.
PAAPAM’s leadership highlighted several challenges faced by the automotive industry, including soaring energy prices, a 160% devaluation of the currency in six years, exceptionally high financing rates, and over 40% taxation on every car sold. These factors have collectively contributed to a decline in sales, with the current production and sales trajectory showing a downward trend for the past five years.
The looming threat of increased car prices, coupled with the challenges already faced by the automotive sector, raises concerns about the potential impact on employment opportunities, tax collections, and the overall health of the industry. As stakeholders engage in discussions with relevant authorities, the automotive industry in Pakistan braces for the potential ramifications of the new sales tax rates.
