Pakistan Approves Five-Year Auto Policy Draft With Major NEV Incentives

The draft Automobile Policy 2026-31, which has been approved by the federal government, is a major change in the automotive sector of Pakistan with an increased incentive for new energy vehicles, a progressive reduction in import duties, shift toward exports and increased competition.

The draft was reviewed by Prime Minister Shekhbaz Sharif who approved the draft and it is now under legal vetting. The Finance Ministry has also been asked to submit the policy to the International Monetary Fund (IMF) for consideration. 

The proposed policy for five years is expected to have a larger impact on the vehicle prices, electric and hybrid vehicles usage, vehicle local assembly and the future of the automotive market in Pakistan.

NEVs to Receive Major Tax Advantages

One of the main modifications in the policy is the special treatment for new energy vehicles.

The draft of the approved law says that NEVs (including their completely knocked down (CKD) kits, parts, inputs and raw materials) will only be subject to 1% sales tax. They will also not pay Federal Excise Duty (FED), Capital Value Tax (CVT) or Withholding Tax (WHT). 

The government, however, has decided to differentiate between different kinds of e-vehicles.

They will be the most auspiciously incentivised, while Range Extended Electric Vehicles (REEVs) and Plug-in Hybrid Electric Vehicles (PHEVs) will be comparatively treated.

The new policy could entice fully electric vehicles to become a more viable purchase for Pakistan's consumers.

Auto Tariffs Set for Gradual Reduction

The policy also calls for a long-term cut in import duty on cars.

Instead of lowering tariff rates drastically in one year, the government will slowly step back from protecting the local automotive industry. The total customs duty on cars is likely to converge to 15% by FY2030-31 and additional customs duty on imported cars is expected to be phased out after two years. 

The approach is a phased one in order to allow local assemblers to adapt and ease the local market into increased competition.

For vehicles of above 1800cc, for instance, the proposed customs duty will be kept at 40% in the initial two years, before reducing to 30% in FY2029-30 and then to 15% in FY2030-31.

Proposed Customs Duty Path

The tariff structure will be reviewed in two years based on energy costs, taxes, interest rates, flexibility of exchange rates and export performance, etc. 

Conventional Cars Will Not Get the Same Relief

While NEVs are being given clear priority, conventional petrol-powered vehicles will continue to face relatively high taxes.

The government intends to impose further FED on conventional vehicles to even the playing field, to some degree, with the price advantage these cars will have due to the reduction in customs duties. But it has removed the proposal to impose a FED on cars under 1,000cc.

The policy assumes a modest price decline for the first few years for smaller conventional vehicles. For example, the costs of cars with up to 850 cc engines are expected to drop by about 5.5% in the first year. 

Around 11% could be expected to be lost for the consumer by the end of the 5th year, though prices of 1500cc cars may drop by the same amount.

Bigger Financing Options for NEV Buyers

The government is also looking to make more finance options available for those looking for new energy vehicles.

The maximum financing amount will be raised from Rs3 million to Rs10 million and the maximum loan repayment period will be extended from three years to 5 years. 

This could increase consumer access to higher-priced EVs for consumers who might not otherwise be able to buy an EV using shorter-term financing.

Also under the policy is a 1% customs duty on charging stations imported into the country, with battery-swapping stations supported as part of the Viability Gap Funding.

Government Targets More Local Production and Exports

The new auto policy doesn't just care about the price of cars. It is also targeting to transform the country's role in the regional car component industry.

The government will invite no less than 5 big auto parts companies and establish clusters of SMEs (small and medium enterprises) around the big companies. It also plans to link manufacturing licences to export commitments and promote participation of local manufacturers in the world value chains. 

Any parts imported for export production would be exempt from duty, and an Auto Parts Export Council is suggested.

The policy also provides for minimum domestic value addition and increased engagement in contract manufacturing to tap existing manufacturing potential.

What the New Auto Policy Means for Car Buyers

The biggest change for consumers is the slow progress toward a more competitive auto market.

One of the proposed benefits of purchasing a NEV is the possible tax exemptions and financing options. As tariff cuts are implemented one by one, conventional car buyers might need to wait longer to see any substantial price drops.

Cars enthusiasts, new launches, imports and policy changes in Pakistan fans will be able to follow the changes of Automotive Policy 2026-31 and impact on actual price.

Conclusion

The approval of the Auto Policy 2026-31 draft is an important milestone for the automotive industry in Pakistan. The plan would provide NEVs a clear tax benefit while steadily phasing out tariff protection for traditional vehicles.

The policy, if put in place as proposed, may help in introducing more competition, incentivize the use of EVs, strengthen local parts manufacturing and encourage Pakistani auto companies to export.

The framework, however, remains under the legal and IMF scrutiny so the final implementation details may still be subject to change prior to the policy going into effect.