As the federal budget for 2025–26 looms, Pakistan’s automotive industry braces for another wave of fiscal adjustments. Historically, the sector has been a frequent target for new taxes and increased duties, and this year appears no different. Budget proposals hint at broader reforms that could significantly reshape car pricing—especially for small and mid-sized vehicles.
Small Car Segment Faces Heavier Burden
One of the most impactful changes on the horizon is the government’s plan to eliminate the concessional sales tax on small cars. Currently, vehicles with engine capacities up to 850cc enjoy a reduced sales tax of 10% to 12.5%. However, proposed amendments to the 8th Schedule of the Sales Tax Act, 1990, aim to bring these vehicles under the standard 18% sales tax rate.
This move would directly affect budget-conscious consumers—especially first-time buyers and low-income families—by making entry-level models significantly more expensive. With popular small cars already nearing unaffordability due to inflation and currency depreciation, this tax change could further shrink the market segment.
Increased Withholding Taxes on Larger Vehicles
The withholding tax (WHT) regime for vehicles is also set for an overhaul. Currently, WHT rates increase progressively based on engine size—from 2% for 1300cc vehicles to 12% for cars above 3000cc. However, under the new budget proposal, these rates are expected to rise further.
More importantly, the government continues to transition from an engine-size-based model to a value-based tax structure. This means that higher-priced cars, regardless of engine capacity, will attract steeper taxes—targeting the luxury car segment more aggressively.
New Environmental Levy on Petrol and Diesel Cars
In a progressive environmental move, the federal government plans to introduce a “Green Tax” of 3% to 5% on all petrol and diesel-powered vehicles. Unlike previous taxes primarily focused on revenue, this measure is designed to seed a national Electric Vehicle (EV) Fund.
The fund aims to generate Rs. 25 to 30 billion annually, totaling Rs. 125 to 150 billion over five years. It will be used to support EV adoption through subsidies, local research, and the development of charging infrastructure—marking a significant step toward sustainable mobility in Pakistan.
Cash Fuel Payments Could Cost More
Another innovative fiscal tool being considered is a surcharge on cash payments at petrol stations. Under the proposal, consumers who pay in cash may face an extra Rs. 2–3 per liter, while digital transactions—via mobile apps, credit cards, or QR codes—will remain taxed at the standard 18%.
This measure is aimed at formalizing the economy and increasing digital traceability of fuel sales. To facilitate this shift, petrol stations across the country will be mandated to offer digital payment options.
What It Means for Car Buyers?
For both current and prospective car owners, the upcoming budget may spell higher upfront costs and ongoing expenses. Those considering a small car may want to act swiftly before the new sales tax takes effect. Luxury car buyers, on the other hand, should prepare for a steeper financial hit due to higher WHT and environmental levies.
As the automotive market adjusts to these changes, demand for electric and hybrid vehicles may rise—provided that the EV Fund delivers on its promises.
Disclaimer:
This article is based on preliminary budget proposals and publicly available information as of June 2025. Final tax measures will be confirmed only after the official announcement by the Ministry of Finance. Readers are advised to consult with automotive dealers or tax professionals for the most accurate and updated guidance.
Afsheen Gohar is a seasoned writer with a wealth of experience in crafting authentic and well-researched articles. Her dedication to delivering high-quality content is evident in her work, where she combines a passion for storytelling with a commitment to accuracy and depth. Afsheen’s writing reflects her ability to engage readers with compelling narratives while providing valuable insights on a diverse range of topics.
