Pakistan Approves Automobile Policy With Major EV Tax Incentives

ISLAMABAD: Prime Minister Shehbaz Sharif has approved the draft Automobile Policy 2026-31, which proposes tax incentives for new energy vehicles (NEVs) while maintaining protection for existing conventional vehicle assemblers for another four years. Customs duty on all cars is planned to eventually fall to 15% in FY2030-31.

The draft will now be sent to the Ministry of Law for legal vetting, while the Ministry of Finance has been directed to approach the International Monetary Fund (IMF) for its review.

The proposed framework has largely been aligned with the National Tariff Policy (NTP), with the new rates expected to apply from the current fiscal year to compensate for the delay in implementing the automobile policy.

During Wednesday’s meeting, the prime minister introduced several changes to the proposed framework. One major change was the decision to treat Range Extended Electric Vehicles (REEVs) and Plug-In Hybrid Electric Vehicles (PHEVs) separately from Battery Electric Vehicles (BEVs).

A committee working to build consensus on the policy had recommended identical treatment for BEVs, REEVs and PHEVs. However, Shehbaz decided that BEVs should receive the highest level of tax concessions, followed by REEVs and PHEVs.

Under the approved draft, NEVs, along with their completely knocked down (CKD) kits, parts, inputs and raw materials, will attract only 1% sales tax. NEVs will also be exempt from Federal Excise Duty (FED), Capital Value Tax (CVT) and Withholding Tax (WHT).

Hybrid electric vehicles and conventional Internal Combustion Engine (ICE) vehicles, meanwhile, will face the same duties and taxes.

To partly offset price reductions expected from tariff cuts, the government plans to impose additional FED on conventional vehicles. However, the prime minister ordered the proposed FED on conventional cars below 1,000cc to be withdrawn.

Financing incentives for NEVs have also been expanded. The maximum financing limit will rise from Rs3 million to Rs10 million, while the repayment period will increase from three years to five years.

Imported charging stations will carry a customs duty of 1%, while battery-swapping stations will receive support through Viability Gap Funding.

The policy targets reductions of up to 80% in automobile tariffs and proposes eliminating regulatory duty. Additional customs duty on imported cars will be removed after two years, although existing assemblers will continue to receive substantial protection during the first two years before it is gradually reduced over the following two years.

Tariff rates will remain unchanged during the first two years, while statutory regulatory orders are scheduled to be phased out by FY2029-30.

According to The Express Tribune, government officials involved in the policymaking process said tariffs on completely built units would remain within the upper limits prescribed by the NTP, except during the final year. The tariff structure will be reviewed after two years, taking into account energy costs, taxes, interest rates, exchange-rate flexibility and export performance.

For cars and SUVs above 1,801cc, customs duty will remain at 40%, with FED at 60% and sales tax at 25% during FY2026-27 and FY2027-28. Customs duty will stay at 40% in FY2028-29, then decline to 30% in FY2029-30 and 15% in FY2030-31. FED and sales tax will remain at 60% and 25%, respectively.

Foreign consultant Stefan Dercon had earlier recommended a 40% customs duty, 30% FED and 20% GST for vehicles above 1,800cc.

For vehicles between 1,001cc and 1,800cc, customs duty will be 50%, FED 15% and sales tax 25% during FY2026-27 and FY2027-28. In FY2028-29, customs duty will fall to 40%, while FED and sales tax will remain at 15% each.

During FY2029-30, customs duty will decline further to 30%, with FED at 15% and sales tax returning to 25%. By FY2030-31, customs duty will reach 15%, while FED and sales tax will remain at 15% and 25%.

For cars up to 1,000cc, customs duty will initially remain at 50% and sales tax at 25% during FY2026-27 and FY2027-28. Customs duty will then fall to 40% in FY2028-29, 30% in FY2029-30 and 15% in FY2030-31, while sales tax will stay at 25%.

Despite the planned tariff cuts, the policy expects limited immediate price relief for conventional vehicles. ICE vehicles up to 850cc are projected to become only 5.5% cheaper in the first year because the government plans to impose an additional 4.5% customs duty, keeping their prices close to comparable NEVs.

ICE vehicles up to 1,000cc are also not expected to see significant price reductions during the initial years. By the fifth year, their prices could decline by around 9%, although annual price increases could reduce the actual benefit.

The government will impose 5% FED on 1,500cc cars to limit part of the benefit from lower tariffs. By the fifth year, prices in this category are projected to decline by 11%, equivalent to around Rs650,000, although annual increases could reduce the final savings.

The Toyota Fortuner is projected to fall in price from Rs20.5 million during the first year to Rs18.6 million by the final year, representing a reduction of around Rs2 million, or 9%.

The policy also aims to expand exports of automobiles and auto parts by connecting locally produced components with global value chains. It proposes fiscally neutral duty and local tax drawback schemes, alongside legally binding and enforceable export requirements.

The government wants to attract at least five major anchor auto-parts manufacturers and develop SME clusters around them. Manufacturing licences will be linked with agreements requiring principals to secure a share of international export markets, while separate CKD imports will be allowed for left-hand-drive vehicles.

Auto parts imported specifically for export production will face no duty. An Auto Parts Export Council will also be created to coordinate export development. A minimum domestic value-addition requirement will be introduced to measure and enforce localisation, while contract manufacturing will be encouraged to reduce costs by making use of existing unused production capacity.

The broader policy goals include establishing upfront performance targets backed by rewards and penalties, expanding EV adoption across vehicle categories, improving vehicle quality, reducing prices outside the luxury segment and increasing competition in innovation, technology and vehicle features.