New auto policy proposes tax cut on 800cc cars

ISLAMABAD: The federal government is holding consultations with the International Monetary Fund (IMF) over a proposal to reduce the sales tax on locally assembled 800cc cars from 18% to 12.5% under the upcoming auto policy, sources said on Friday.

According to sources, the IMF had initially opposed the proposal to lower the sales tax on vehicles up to 800cc from 18% to 12.5%. However, discussions between the government and the lender are continuing as part of the formulation of the new auto policy.

Prime Minister Shehbaz Sharif has directed the relevant authorities to make the new auto policy more investor-friendly with the aim of attracting fresh investment and generating employment in Pakistan’s automobile sector.

Sources said the new policy will also seek to improve the competitiveness of the local auto industry by adopting internationally recognised safety standards for vehicles manufactured in Pakistan.

The government will continue consultations with the IMF regarding proposed tax incentives before finalising the policy.

The new auto policy is expected to be unveiled in August.

According to sources, the policy will include measures to promote electric vehicles (EVs), hybrid vehicles and plug-in hybrid electric vehicles (PHEVs). It also proposes the introduction of a carbon tax on the engines of locally manufactured petrol and hybrid vehicles.

In line with United Nations regulations, the policy aims to ensure compliance with 62 internationally recognised vehicle safety standards for both imported and locally manufactured vehicles.

The proposed policy is also being reviewed in consultation with the Federal Board of Revenue (FBR), the Ministry of Science and Technology, the Ministry of Commerce and the Ministry of Law.

Auto policy to make hybrid cars expensive in Pakistan?

After inter-ministerial consultations are completed, the draft policy will be presented before the Cabinet’s Economic Coordination Committee (ECC) for consideration, sources added.

Meanwhile, hybrid vehicles assembled in Pakistan have become significantly more expensive after the government increased the sales tax on them from 8.5% to 18%, a measure that came into effect with the start of the new fiscal year on July 1, 2026.

The revised tax rate applies to both hybrid and plug-in hybrid vehicles. In addition, the sales tax on all imported and locally assembled plug-in hybrid vehicles has been increased from 1% to 18%.

The tax revisions were introduced under the Finance Act 2026, which also brought an end to Pakistan’s five-year automotive policy. Until the new auto policy is formally announced, the revised sales tax rates will remain in effect.