Pakistan’s new auto policy was meant to take effect on July 1. It is yet to be finalised. Meanwhile, the automotive industry continues pricing vehicles, opening letters of credit, and signing dealer agreements in the dark — unaware of the tax burden those cars will carry next year.
The latest bottleneck arose during the International Monetary Fund’s fourth review of the Extended Fund Facility. In late September, the Ministry of Industries and Production presented its draft Auto Policy 2026-31 to the IMF mission, but talks concluded without an agreement. The primary sticking point is the proposed one per cent sales tax on new energy vehicles. The Fund wants the standard 18pc rate. On a Rs10 million car, that single disagreement represents the difference between a tax of Rs100,000 and Rs1.8mn.
Low tax rates matter, but the rate itself is only half the story. The crucial second half is defining what this policy is actually for.
In FY26, Pakistan spent $16.9 billion on petroleum imports, a major portion of which was burnt on its roads. The government aims for 30pc of new vehicle sales to be electric by 2030, a transition estimated to save about $1bn annually in foreign exchange, 2bn litres of fuel, and 4.5mn tonnes of carbon emissions. For a nation recovering from devastating floods and choking on severe winter smog every year, these are not side benefits. They are the entire point.
Low tax rates matter, but defining the policy is also crucial
Both sides of the current argument are partly right. The Fund has watched Pakistan repeatedly carve up a narrow tax base through special rates and Statutory Regulatory Orders (SROs), knowing temporary concessions almost invariably become permanent. The ministry is equally right that electric vehicles cost more upfront, charging infrastructure remains thin, and buyers harbour deep anxieties about battery life and resale value. Imposing the standard tax rate overnight would reduce the 30pc EV target to a line on paper.
However, the draft policy has a glaring weakness of its own. Customs duties on conventional cars are scheduled to fall sharply, but reports suggest this gap will simply be refilled through higher Federal Excise Duty and floor prices on imported vehicles -- essentially building the same protective wall with different bricks.
In the meanwhile, tax rates keep moving by notification. The concessional 8.5pc sales tax on most hybrids expired on June 30 with the expiry of the last auto industry development and export policy, causing taxes on locally made hybrids to jump to 25pc. Then, in September, the Federal Board of Revenue issued SRO 1525(I)/2026, bringing locally manufactured hybrids up to 2,000cc back down to 18pc.
The relief was welcome, but the same car underwent three distinct tax rates in as many months, and the final adjustment came through SRO rather than any transparent policy. An investor deciding whether to establish an assembly plant does not mainly ask whether the tax is 1pc or 18pc. They ask what the tax will be in 2029, and whether that answer will survive the next budget cycle.
A better structure would rest on five sensible pillars:
First, agree on 18pc as the ultimate destination and legislate a clear roadmap to get there. Keep the 1pc tax rate until June 2027, when current concessions lapse, then step it up incrementally each year to reach the standard rate by FY2030. Low taxes in the early years build the market: China exempted electric cars from purchase tax for nearly a decade, and Norway waived VAT before both began phased rollbacks. Support should be generous at the start, but bound by a firm expiration date.
Second, target the relief. A Rs30mn luxury import does not need the same fiscal cushion as a compact car, a taxi, or a rickshaw. Capping concessions by price or battery size concentrates public money where the public benefit actually lies.
Third, set a clear tech ladder. The combined burden of duty and tax should be highest on conventional petrol cars, lower on hybrids, lower still on plug-in hybrids, and lowest on fully electric vehicles. Battery electric vehicles and range-extended EVs should share one tax structure at the bottom because their powertrain is fundamentally the same.
Fourth, follow the National Tariff Policy honestly. Bring duties on fully built imports down as announced, eliminate additional and regulatory duties by FY30, and do not rebuild protectionism through excise duty. Maintain a moderate, transparent gap between duties on built-up imports and kits for local assembly, fixed for the life of the policy.
Fifth, reward localisation through component tariffs, not sales tax exemptions. Offering low duties on battery packs, electric motors, and controllers for a fixed period from the start of local production is a far cleaner incentive that directly rewards genuine investment.
The last important point is that established assemblers and vendor networks support over a million livelihoods, as per PAAPAM, and their fear of a uniform tariff cut is legitimate: localisation that took decades to build can be dismantled in a year. But ‘raw’ protectionism alone has failed to deliver scale or competitiveness. Local content in Pakistani passenger cars averages about 58pc, compared to roughly 80pc in India.
The electric transition is a chance to rewrite that story. Localisation incentives should go to value added whether the carmaker is old or new, and vendors, who retool for electric components, should receive the same parts concessions and long-term financing.
The government has a short window before the revised draft goes to the Cabinet. The right path forward is simple to state: agree on the end-state with the Fund, publish a binding dated schedule, target support where it moves the most people and goods, classify tax tiers by technology, and leave the rules alone long enough for someone to build a factory around them.
Every day of delay is paid for in lost foreign exchange, dirtier air, and a target that slips further away. Low taxes will start the market. Only predictable taxes will build the industry behind it.
The writer is an energy finance professional with over 20 years of experience.
Published in Dawn, The Business and Finance Weekly, October 26th, 2026
