IMF Rejects Proposal for Reduced Sales Tax on Electric Vehicles
The International Monetary Fund (IMF) has not accepted a proposal to impose a 1% sales tax on new energy vehicles (NEVs), including electric vehicles, in Pakistan. This development has added to the uncertainty surrounding the new auto policy, which is already facing inter-ministerial disagreements over the duty structure.
On Thursday, the government proposed to the IMF that sales tax on hybrid vehicles be set at 50% of the standard 18% rate, and a 1% sales tax be charged on NEVs. However, the IMF refused to allow these reduced rates, making it difficult to finalize the Auto Policy 2026-31 before June 24.
Any changes in sales tax and import duties must be incorporated into the budget, which the National Assembly is expected to pass on Wednesday. The existing auto policy expires this month, and no final draft is ready for inclusion in the tax laws, according to sources.
Government Proposals Rejected
Government officials told The Express Tribune that tax and duty structure proposals were shared with the IMF on Thursday. The IMF once again did not agree to any of these proposals and sought further clarifications. Special Assistant to Prime Minister on Industry Haroon Akhtar Khan declined to comment on whether the IMF rejected the 1% sales tax proposal.
Finance ministry officials said the IMF turned down the proposal to reduce the sales tax rate for all types of vehicles, including electric vehicles, and wants the standard sales tax rate to apply, with any price reductions given through direct subsidies. The IMF's resident representative did not respond to a request for comment.
Inter-Ministerial Disagreements
Internal meetings to firm up the government's position on the auto policy, including those chaired by Deputy Prime Minister Ishaq Dar, remained inconclusive. One reason for the lack of clarity is that the industry ministry did not seek inter-ministerial consultation under Rule 8 of the Rules of Business. This has led to serious disagreement between the Ministry of Commerce and the Ministry of Industry, the two key stakeholders.
The commerce ministry is the custodian of the National Tariff Policy, while the auto policy is the responsibility of the industry ministry. However, the auto policy must align with the National Tariff Policy, now in its second year of implementation. When contacted, the commerce ministry said only the industry ministry can comment on auto policy issues.
Proposed Duty Structure for NEVs
Sources said the industry ministry proposed that NEV-specific parts may attract 1% customs duty for three years and 5% from year four onwards, with sales tax on imports of these parts exempted during the policy period. The sales tax on local supply and sale of NEVs is proposed at 1% for five years. The Ministry of Industry also proposed exemption from federal excise duty, capital value tax, and withholding tax on the sale of NEVs during the policy period.
The industry ministry has faced criticism for proposing tax exemptions and concessions for the automobile sector despite slow progress on vehicle localisation. One disagreement between both ministries is that the industry ministry wants higher import duties on locally assembled vehicles, while the commerce ministry wants to implement the National Tariff Policy capping maximum customs duty at 15% by 2030.
The industry ministry argues that the 15% cap was not an IMF condition, which simply requires a weighted average tariff below 6%, achievable even with duties as high as 50%. However, according to the policy approved by the federal cabinet, the 20-50% customs duties for 2026-27 will be reduced to 15% in 2030. Likewise, the current 20% duty slab will be 10% in 2030 and the 15% slab will go down to 5%.
Localisation Challenges
Localisation remains restricted to peripheral, low-tech components, with high-value, capital-intensive components remaining imported. Industry players argue that low production is due to a lack of localisation of value-intensive parts, requiring economies of scale estimated at 500,000 units annually to justify fixed investment in tooling and research and development.
The draft policy proposes localisation of up to 85% domestic value addition for 2-3 wheelers, including L6 and L7 category EVs, by 2030, to be met through local assembly of core EV components including battery packs, electric motors, and controllers. Companies failing to achieve these milestones shall not be eligible for tariff concessions and shall be immediately suspended, according to the draft policy.
The policy prioritises immediate localisation efforts for components currently imported, explicitly shifting focus towards complex system manufacturing. Priority components include critical systems across various segments: internal combustion engine and hybrid components (engines, transmissions, crankshafts, transmission housings, oil pumps, fuel injection components, and shock absorbers) and NEV components (electric motors, battery management systems sub-modules, power electronics, motor housing, and battery packs).
Heavy Levies on Combustion Engine Cars
To promote NEVs, the industry ministry has proposed heavy levies on combustion engine cars, with ad valorem levies of 5% on cars worth Rs15-20 million, 10% on Rs20-25 million, and 15% on vehicles above Rs25 million. The policy recommends that the maximum depreciation rate of 30% be locked for all used motor vehicles imported into Pakistan, including vehicles older than three years but not older than 50 years from their original manufacturing date.
The draft policy also proposes that Statutory Regulatory Orders, including SRO 655, SRO 656, and SRO 693, alongside associated exemptions under the Fifth Schedule of the Customs Act 1969, be reviewed and gradually phased out by 2030. The Industry Ministry believes that gradual phasing out will help reduce the weighted average applied tariff to under 6% by June 2030, effective from July 1, 2026. This process will affect customs duties, additional customs duties, and regulatory duties on all automotive completely built units, completely knocked down units, parts, components, and raw materials.
