The federal government of Pakistan has rejected an International Monetary Fund’s (IMF) proposal to impose 18 percent sales tax on Electric Vehicles (EVs), approving a new auto policy that sets lower tax rates for battery-powered and other alternative-energy vehicles, alongside phased reductions in import duties.
Prime Minister (PM) Shehbaz Sharif approved the draft Auto Policy 2026-31 on Tuesday. The government will submit the final draft to the IMF for approval before seeking the federal cabinet’s endorsement. It will then introduce legislation in parliament to implement the proposed tax changes.
Under the draft policy, the government plans to set the sales tax rate at one percent for Battery Electric Vehicles (BEVs), six percent for Range-Extended Electric Vehicles (REEVs) and nine percent for Plug-in Hybrid Electric Vehicles (PHEVs), covering both locally assembled and imported vehicles. The proposed rates remain subject to IMF approval.
The policy divides New Energy Vehicles (NEVs) into three categories: BEVs, REEVs and PHEVs. Hybrid Electric Vehicles (HEVs) and conventional Internal Combustion Engine (ICE) vehicles will face the same duties and taxes.
For eligible imported electric vehicles valued at up to $75,000, the government plans to reduce customs duty from 50 percent to 25 percent initially and then to 15 percent by fiscal year 2030-31.
The draft also proposes a five percent tariff for the first two years on imported NEVs priced below $15,000, while imports of electric-vehicle-specific parts that are not manufactured locally and arrive in Completely Knocked-Down (CKD) form will face a one percent tariff.
The PM also approved an increase in the credit limit for NEV financing from Rs3 million to Rs10 million, while the maximum financing period will rise from three years to five years.
The policy proposes higher Federal Excise Duty (FED) rates for conventional vehicles with engine capacities above 2,000cc and NEVs priced above $75,000. It also introduces an internal combustion engine levy ranging from two percent to 10 percent, with the government expecting to collect Rs232 billion over five years to fund incentives for car manufacturers.
Under the proposed duty structure, customs duty on ICE cars and SUVs will fall to 15 percent by 2031, without additional or regulatory duties.
For NEVs, the customs duty will stand at 1 percent for prime movers, trucks, dumpers and passenger vehicles, while completely built-up units in the four-wheel and other NEV categories will face a 15 percent rate.
The policy also projects changes in vehicle prices during its first year. The Suzuki Alto, currently priced at Rs3.2 million, will fall to Rs2.845 million, while the Wuling Bingo BEV will drop from Rs4 million to Rs2.7 million.
Suzuki Cultus will decrease from Rs4.3 million to Rs3.8 million, while the comparable BEV will fall from Rs5.3 million to Rs3.6 million. The Toyota Yaris 1496cc will decline from Rs6 million to Rs5.3 million, while the Baojun Yep Pulse BEV will drop from Rs6.3 million to Rs5 million.
The proposed changes will also bring the Kia Sportage’s price down from Rs12.2 million to Rs11.1 million, while the Haval AWD PHEV will fall from Rs12.9 million to Rs11.1 million. The MG HS ICE will decrease from Rs9.5 million to Rs9.2 million, and its comparable PHEV will drop from Rs10.3 million to Rs9 million.
In contrast, the Toyota Fortuner’s price will rise from Rs20.5 million to Rs21.7 million following the proposed five percent FED and 10 percent ICE levy. The comparable RAV PHEV will fall from Rs23.3 million to Rs18.3 million.
The policy sets an export target of $6 billion for the automotive sector. Manufacturers will receive compensation equal to five percent of the net value of exports, with the incentive rising to 10 percent on incremental exports.
Manufacturers that fail to meet minimum export targets will face penalties ranging from one percent to three percent of their annual production value. Failure to meet the targets for two consecutive years will result in cancellation of the manufacturing certificate.
The government also proposes an automotive development levy on ICE vehicles with engine capacities above 1,000cc to finance export incentives under a revenue-neutral duty Drawback of Local Taxes and Levies (DLTL) scheme.
