Pakistan’s auto industry expects the 25% sales tax slab on certain vehicles to be rationalised to 18% in the upcoming auto policy, a move that industry stakeholders believe could revive demand and restore balance in the market.

The expectation emerged during an analyst briefing by Indus Motor Company (INDU) on its half-yearly financial results for FY26, where management indicated that the existing tax structure may be revised in the next policy cycle.

According to the company, rationalising the sales tax rate could improve affordability and stimulate demand in a market that has experienced sharp volatility over the past two years due to high inflation, currency depreciation and elevated interest rates.

Industry representatives argue that the current 25% sales tax, applied to higher engine capacity vehicles and cars above a certain price threshold, has created distortions in the market and discouraged consumers.

Former chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) Abdul Rehman Aizaz said the increase in sales tax from 18% to 25% was unjustified and ultimately burdens consumers rather than manufacturers.

“Look, in the first place, it is an injustice that the sales tax was increased to 25%. Ultimately, this sales tax is paid by the consumer. Neither Indus nor Honda pays it,” Aizaz said.

He also criticised the disparity between taxes on conventional internal combustion engine (ICE) vehicles and incentives offered to electric vehicles (EVs).

“There’s no reason why the sales tax on an internal combustion engine car should be 25%, while for electric vehicles and other cars it is much lower, sometimes as low as 1% or even zero,” he said.

According to him, such a tax structure risks creating an uneven playing field for established local manufacturers that have invested heavily in localisation and employment.

“All the employment in the industry has been generated by companies like Suzuki, Indus and Honda. They have localised auto parts and built an ecosystem over decades,” he noted.

He cautioned that the rapid influx of imported EV models assembled from semi-knocked-down (SKD) kits could undermine local industry development.

“New EV models are coming into the market almost every day. These are imported in SKD form without localisation. They assemble the parts and sell the car,” he said.

Aizaz argued that if the government reduced the sales tax from 25% to 18%, overall sales volumes would increase and eventually generate higher tax revenue in absolute terms.

He also warned against repeating policy mistakes of the past, citing the example of the Compressed Natural Gas (CNG) sector.

“About $5 billion was invested in the CNG sector due to extraordinary incentives. Today, that entire investment has gone down the drain, and the stations stand as ruins,” he said.

Asim Ayaz, Manager Policy at the Engineering Development Board (EDB), expressed his personal view that any sales tax beyond the standard 18% rate should generally be discouraged, as excessive taxation tends to suppress demand and slow industrial growth.

Another industry expert, Shafiq Ahmed Shaikh, said the increase in sales tax primarily targeted vehicles classified as luxury or high-end models.

The measure aimed to generate around Rs4.5 billion in additional revenue annually, “but it was not welcomed by industry stakeholders who argued that it would suppress an already struggling market,” he said. In 2024, the government raised sales tax from 18% to 25% on locally manufactured or assembled vehicles with engine capacity of 1,400cc and above and on vehicles with invoice prices exceeding Rs4 million, excluding sales tax.

The higher tax rate also applies to SUVs, crossover utility vehicles (CUVs) and double-cabin 4×4 pick-up vehicles produced or assembled locally. According to industry data, the sector had already been facing severe contraction, with car sales dropping by more than 60% in December 2023 and by 47.6% year-on-year during the first seven months of FY2024.

Experts say the cumulative tax burden on vehicles in Pakistan, including sales tax, duties and other levies, now constitutes nearly 50% of the final retail price of a car, making vehicles increasingly unaffordable for middle-income consumers. “Production levels are significantly lower despite adequate installed capacity. If taxes and duties are reduced, sales will increase, and the government could generate higher revenue from greater volumes,” he explained.

However, he also noted that the government’s broader tax reform agenda aims to streamline the system. While the 25% tax rate targets higher-end vehicles, the FY26 budget also proposed increasing GST on smaller cars from 12.5% to 18% in an effort to unify the tax structure across segments.

Despite industry calls for relief, Shaikh believes the existing tax structure may largely remain in place in the near term.

“In my opinion, the same tax rate may continue, as supportive instalment schemes from banks and government incentives are available to help consumers purchase vehicles,” he said.