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Arguments between government departments are delaying the new car policy.
BY Mahnoor | 20-06-2026
ISLAMABAD: The IMF rejected a plan to charge a 1% sales tax on new energy vehicles, such as electric cars. This happened because government departments are arguing about taxes, making the new auto policy uncertain.
On Thursday, the government suggested to the IMF that hybrid vehicles should be taxed at 9% (half of the usual 18% rate) and that new energy vehicles should only have a 1% tax.
It is difficult to finish the 2026-31 Auto Policy by June 24 because government ministries cannot agree and the IMF refused to lower sales tax rates. Any updates to taxes or import duties must be included in the new budget, which the National Assembly will likely pass this Wednesday. The current auto policy ends this month, and a final version is not yet ready for the tax laws.
Officials told reporters that they shared tax proposals with the IMF last Thursday, but the IMF rejected them and asked for more details. Haroon Akhtar Khan, a government industry advisor, would not say if the IMF rejected the plan to charge only 1% tax on hybrid and electric cars.
Finance ministry officials said the IMF rejected a plan to lower sales tax on all vehicles, including electric ones. Instead, the IMF wants the usual tax rate to stay the same, suggesting that any price cuts should come from direct government subsidies.
The IMF’s local representative did not comment on this.
Sources say government meetings to finalize the auto policy, including those led by Deputy Prime Minister Ishaq Dar, failed to reach a decision. This happened partly because the industry ministry did not consult with other government departments as required by official rules.
Because established rules were not followed, the Ministry of Commerce and the Ministry of Industry are now in a serious disagreement. The Commerce Ministry manages national tax policies, while the Industry Ministry manages car policies. These two must work together, but the Commerce Ministry says only the Industry Ministry can speak on car issues.
Sources say the Industry Ministry wants to charge a low 1% tax on electric vehicle (EV) parts for three years, increasing to 5% later, with no sales tax during this time. They also propose a low 1% sales tax on selling EVs locally for five years and want to remove several other major taxes on EV sales to encourage more use.
The industry ministry is being criticized for offering tax breaks to car companies even though they aren’t making enough parts locally. Two ministries are arguing: the industry ministry wants higher taxes on imported cars, but the commerce ministry wants to lower all import taxes to a maximum of 15% by 2030.
The industry ministry says the IMF does not require this 15% limit; the IMF only asks for an average tax rate below 6%, which is possible even if some taxes remain high. However, a government plan states that current import taxes of 20-50% must drop to 15% by 2030. Similarly, the 20% tax rate will drop to 10%, and the 15% rate will drop to 5% by then.
Currently, only simple, cheap parts are made locally, while expensive and high-tech parts are still imported. Companies say production is low because they cannot make the expensive parts locally. To justify the cost of tools and research, they need to produce at least 500,000 units every year.
The new draft policy aims to have 85% of parts for motorcycles and small electric vehicles made locally by 2030. This includes making batteries, motors, and controllers at home. Companies that do not meet these goals will lose their tax breaks and will be suspended from the program.
The new policy focuses on making parts locally instead of importing them, especially for complex systems. Key parts to make include components for gas and hybrid engines (like engines, transmissions, and fuel parts) as well as electric vehicle parts (like motors, batteries, and power systems).
To encourage electric vehicle use, the government plans to tax gas-powered cars more heavily based on their price: 5% for cars costing Rs15-20 million, 10% for Rs20-25 million, and 15% for cars over Rs25 million.
The new policy suggests a fixed 30% depreciation rate for all used cars imported into Pakistan. This applies to vehicles between three and 50 years old.
The policy also plans to slowly remove several tax exemptions and special orders by 2030. The Ministry of Industry aims to lower the average import tax to less than 6% by June 2030, starting July 1, 2026. This change will affect taxes on finished cars, car parts, and raw materials.
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