FBR Proposes Withholding Tax Hike on Vehicles Above 1300cc in Budget 2025-26

As the Government of Pakistan prepares the Federal Budget 2025-26, the Federal Board of Revenue (FBR) has put forward a key proposal: raising the withholding tax rates on vehicles with engine capacities exceeding 1300cc as per media reports, aiming to boost national revenue through the automobile sector.

Current Tax Structure and Proposed Revisions

At present, the withholding tax structure on vehicles is based on engine capacity and is charged as a percentage of the vehicle’s value. The rates are currently as follows:

• 2% for vehicles with engine sizes between 1300cc and 1600cc
• 3% for up to 1800cc
• 5% for up to 2000cc
• 7% for up to 2500cc
• 9% for up to 3000cc
• 12% for vehicles exceeding 3000cc

According to recent media reports, the FBR is now recommending higher rates across these brackets to enhance tax collection, especially from the luxury vehicle segment. While the specific increase percentages have yet to be confirmed, the proposal is part of a broader fiscal strategy to tap into high-value asset markets for greater revenue generation.

From Fixed Tax to Value-Based Collection

This move follows last year’s budgetary shift from fixed-rate withholding taxes to value-based taxation, wherein a vehicle’s price — rather than just its engine size — plays a pivotal role in tax assessment. This policy change has proven effective, with the FBR reporting over Rs. 4 billion collected in vehicle taxes during FY25.

If the proposed rate hikes are implemented, tax revenue from vehicles is projected to rise further in FY26, potentially surpassing previous collections. The revision could also impact car buyers and the auto industry, particularly in the mid- to high-end vehicle segments, prompting a reevaluation of purchasing trends.

Impact on Consumers and Industry

While aimed at increasing government revenues, the tax hike may also deter consumers from purchasing larger-engine vehicles, possibly shifting market demand toward smaller, fuel-efficient, or hybrid vehicles. Industry stakeholders, including car manufacturers and dealers, are expected to monitor the situation closely ahead of the budget announcement.

As Pakistan continues to grapple with fiscal pressures, vehicle taxation remains a critical lever in the FBR’s broader strategy to expand the tax net and stabilize public finances.

Afsheen Gohar

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