Pakistan to Raise Taxes on Luxury Vehicles, Favor Hybrids
Pakistan is set to significantly increase withholding taxes on high-end vehicles in its FY2025-26 budget, expanding the tax net to cars with engine capacities as low as 1300cc. This move aims to tap into the country’s affluent automotive market, which has contributed over Rs4 billion in withholding taxes this year.
Tax Structure Changes
The Federal Board of Revenue has proposed a new tax structure that will affect various engine capacity brackets. Vehicles between 1300cc and 1600cc will see their tax rate jump from 2% to 3% of the vehicle’s value. The top tax bracket, applicable to cars above 3000cc, will face a 16% levy, up from 12%. This revised tax regime, already shared with the International Monetary Fund, builds upon last year’s shift to a value-based tax model that initially targeted vehicles above 2000cc.
Rationale Behind the Move
By lowering the engine capacity threshold for luxury car taxes, the government aims to boost revenue collections significantly. Officials hope to achieve this without sparking a political backlash by pulling smaller engine vehicles into the “luxury” category.
Exception for Hybrid Vehicles
In a contrasting move, the government has decided to extend reduced sales tax rates for locally assembled hybrid electric vehicles (HEVs) through June 2026. The sales tax rate for HEVs up to 1800cc will remain at 8.5%, while those up to 2500cc will be taxed at 12.75%. This decision comes after the Japan Chamber of Commerce and Industry urged Pakistan to favor hybrids over a rapid transition to battery electric vehicles (BEVs).
Implications and Context
This tax policy adjustment reflects Pakistan’s current approach to automotive taxation and its electric vehicle strategy. While the country is looking to increase revenue from luxury vehicles, it is also taking a cautious approach towards promoting cleaner automotive technology. The government’s decision to continue favoring hybrid vehicles may be seen as a compromise between environmental concerns and the demands of the automotive industry.
The new tax measures are part of Pakistan’s broader fiscal strategy, which is influenced by its commitments to international financial institutions like the IMF. As the country navigates its economic challenges, the automotive sector is likely to play a significant role in shaping its revenue collection efforts.
