In the FY25 Budget, a hue and cry emerged as the government had withdrawn the proposal to impose a 25 per cent sales tax on hybrid electric vehicles (HEVs) and restored the 8.5pc tax owing to huge pressures from luxury auto assemblers. This might have caused the loss of a whopping Rs30 billion to the national exchequer on an annualised basis.

Finance Minister Muhammad Aurangzeb, while wrapping up discussions on the budget 2024-25 in the National Assembly, surprised everyone by announcing that the current reduced sales tax rate would continue to apply to HEVs mentioned in Schedule 8 and Serial No 73.

Market experts last year feared that this general sales tax (GST) concession would grow to Rs50bn as more assemblers geared up to roll out hybrid models.

Last year, tax authorities believed that the GST concession must be withdrawn, as rich and well-off customers can easily pay the tax, and the government should avoid providing any more subsidies to the privileged class anyway.

In the FY26 Budget, a sort of confusion has emerged, as in his speech, Finance Minister Muhammad Aurangzeb proposes an 18pc GST applicable on all diesel, petrol and hybrid vehicles on which GST is currently less than 18pc. However, the industry is sceptical since this decision is currently missing from the FY26 Finance Bill.

According to BMA Capital, this GST normalisation does not apply to hybrid vehicles, as indicated by the omission of serial number 72 in the Finance Bill 2025, with hybrid vehicles continuing to be protected under serial number 73.

Market analysts believe that an increase of GST to 18pc from 8.5pc on hybrid vehicles and a rise in GST to 18pc from 12.5pc on vehicles under 850cc would raise prices by Rs138,000 to Rs1.4 million.

A new energy vehicle (NEV) adoption levy has been introduced in the FY26 budget: 1pc on engines below 1,300cc, 2pc on engines between 1,300cc and 1,300cc–1800cc; and 3pc on engines above 1,800cc (applied on the invoice price including duties and taxes). As per the Insight Securities report, this will be a negative for Honda Atlas Cars Limited and Indus Motor Company (IMC), while the impact on Sazgar Engineering will be minimal, as the majority of its sales come from HEVs.

Though the government can raise Rs15-20bn through this measure, Top Line Securities believes that this would be negative for auto manufacturers operating with Internal Combustion Engines.

The government in the new budget has unveiled the National Tariff Policy 2025–2030, which includes the following key reforms: i) Elimination of additional customs duty over 4 years; ii) Removal of regulatory duty within five years; iii) Abolition of the fifth Schedule of the Customs Act, 1969, over five years; and iv) Rationalisation of customs duties into four slabs: 0pc, 5pc, 10pc, and 15pc, with 15pc as the upper limit.

According to Insight Securities, a gradual and well-planned implementation of this framework is essential, as poorly executed reforms could disrupt domestic industries, while a mannered approach can yield long-term benefits for both consumers and the broader economy.

Ahead of the new budget, the market was abuzz with reports over an increase in the age limit of used cars to five years from three years or allowing commercial imports of cars as per the International Monetary Fund’s pressure. However, the government has not touched these sensitive issues in the new budget owing to rising pressure from the local assemblers.

Commenting on the uncertainty over the GST hike on hybrids, CEO of Indus Motor Company, Ali Asghar Jamali, emphasised the need for a consistent long-term auto policy. High taxes have already curbed demand and reduced market volumes despite multiple new entrants. “Further taxation [if any] would hurt the demand, undermine climate goals tied to hybrid vehicles, and discourage foreign investment,” he feared.

With hybrids serving 11pc of demand, policy shifts risk damaging both investor confidence and environmental progress, he said.

On the NEV adoption levy, he said Pakistan’s automotive sector, burdened by 40–60pc taxes, now faces added strain from the NEV levy. Despite new entrants and diverse offerings, demand would likely decline. With only 24pc utilisation of the 500,000-unit capacity of the country, the market risks further contraction. This may also fuel illegal used car imports, inflating the import bill without boosting economic growth, he added.

On National Tariff Policy 2025-2030, he said while the Federal Board of Revenue’s tax collection target of Rs 14.13 trillion for FY26 reflects fiscal ambition, tariff rationalisation may challenge these goals by reducing import duty revenues.

In the short term, he said the policy may boost car imports, but with the large-scale manufacturing (LSM) sector negative growth of 1.5pc, local manufacturing would decline further. This may exacerbate unemployment, widen the trade deficit, and put pressure on the rupee. Without complementary industrial support measures, long-term economic and industrial resilience may be compromised, he added.

On a future sales scenario in FY26, Jamali said high taxes and policy instability have already curbed auto demand in Pakistan, with only 24pc capacity utilisation and negative LSM growth of 1.5pc.

Further taxation/levy would reduce affordability, deter investment, and hurt climate goals. A rising trend in illegal used car imports may worsen the trade deficit. Without a consistent long-term policy and industrial support, the automotive sector risks further decline, increased unemployment, and broader economic instability, CEO IMC added.

General Manager of MG Motors, Syed Asif Ahmed, said, “The industry is seeking clarity on the recent budget.”

He said HEV enjoys 8.5pc GST versus 18pc GST on electric vehicles (EV). This anomaly existed for many years, giving an advantage to HEVs over EVs. However, social media has reported an increase in GST for HEV from 8.5pc to 18pc. “If it is true, then this would jeopardise the huge investment done by almost all automakers on HEV,” he said.

Mr Ahmed said, “The finance bill is also silent on the subject as per the Automotive Industry Development and Export Plan 2021-26 commitment of no change in tariff till June 2026. There is a need for EV GST to be reduced to 8.5pc to match HEV.”

Similarly, used car importers are abusing the gift, baggage and transfer of residence scheme for commercial trading. If the used car commercial imports for five-year-old cars are allowed with reduced regulartory duty, this would change the playing field against local assemblers, MG Executive said.

An assembler, who asked not to be named, was of the view that “the proposed budget for FY26 has created uncertainty and confusion around the government’s policy direction for the auto industry.”

Taxing both fossil fuel and hybrid vehicles would significantly raise prices, further contracting demand at a time when the industry is in a recovery phase, he said, adding that this would likely lead to a continued decline in demand, shrink local production volumes and undermine investor confidence.

The assembler said the industry humbly urged the government to adopt a coherent, climate-aligned, and industry-supportive policy framework that fosters sustainable growth and inclusiveness of all technologies, including hybrids.

As per data from the Pakistan Automotive Manufacturers Association, sales of cars, sports utility vehicles, pickups and vans surged by 39pc to 126,226 units in 11MFY25 from 90,545 in the same period last fiscal, thanks to a stable macroeconomic environment, lower interest rates, easing inflation and improving consumers’ sentiments.

Myesha Sohail of Top Line Securities expects momentum to continue in auto sales in FY26 based on the lower interest rates and the pipeline of new models to be launched by companies across different engines, ie hybrid and plug-in hybrid vehicles.

Published in Dawn, The Business and Finance Weekly, June 16th, 2025