ISLAMABAD: The federal government is considering reducing the sales tax on locally assembled 800cc cars from 18% to 12.5% under Pakistan’s upcoming auto policy, with consultations currently underway with the International Monetary Fund (IMF), according to official sources.
The proposed tax relief is part of broader discussions aimed at reviving Pakistan’s automobile industry and encouraging investment in the small-car segment. Sources said the IMF had initially opposed the proposal to lower the sales tax but negotiations between the government and the lender are continuing before the policy is finalized.
Prime Minister Shehbaz Sharif has directed the relevant ministries to formulate an investor-friendly auto policy that attracts fresh investment, boosts local manufacturing, and creates employment opportunities across the automotive sector.
The new policy is also expected to improve the competitiveness of Pakistan’s automobile industry by introducing internationally recognized vehicle safety standards and encouraging technological upgrades.
Government officials said consultations with the IMF on tax incentives will continue before the final draft is approved. The new auto policy is expected to be announced in August 2026.
In addition to tax relief for small vehicles, the proposed policy includes measures to promote electric vehicles (EVs), hybrid electric vehicles, and plug-in hybrid electric vehicles (PHEVs). It also recommends introducing a carbon tax on the engines of locally manufactured petrol and hybrid vehicles as part of Pakistan’s environmental commitments.
Under the proposed framework, both imported and locally manufactured vehicles will gradually be required to comply with 62 internationally recognized safety standards in line with United Nations regulations.
The draft policy is being prepared in consultation with the Federal Board of Revenue (FBR), the Ministry of Commerce, the Ministry of Science and Technology, and the Ministry of Law before being submitted to the Cabinet’s Economic Coordination Committee (ECC) for approval.
Hybrid Vehicles Become Costlier After Finance Act 2026
The proposed reduction in sales tax for 800cc cars comes shortly after hybrid vehicles became significantly more expensive following tax changes introduced through the Finance Act 2026.
Effective July 1, 2026, the sales tax on locally assembled hybrid vehicles was increased from 8.5% to 18%. The same 18% rate now applies to plug-in hybrid electric vehicles assembled in Pakistan.
The government also raised the sales tax on imported and locally assembled plug-in hybrid vehicles from 1% to 18%, ending several tax concessions previously available to environmentally friendly vehicles.
These tax revisions took effect after the expiry of Pakistan’s previous five-year automotive policy. The revised tax regime will remain in force until the government formally announces and implements the new auto policy.
