Pakistan’s plans to promote electric vehicles (EVs) through tax incentives have encountered a major hurdle after the International Monetary Fund (IMF) reportedly rejected a proposal to impose a reduced 1 percent sales tax on new energy vehicles. The development has created fresh uncertainty over the finalization of the country’s upcoming Auto Policy 2026-31, which is expected to replace the current policy set to expire at the end of June.
According to reports, the government proposed a series of incentives aimed at accelerating the adoption of cleaner and more fuel-efficient vehicles. These included reducing the sales tax on hybrid vehicles to half of the standard 18 percent rate and imposing only a 1 percent sales tax on electric and other new energy vehicles. However, the IMF reportedly opposed the proposal and requested further clarification from Pakistani authorities.
The disagreement comes at a critical time as the government works to finalize the new auto policy before June 24. Officials have indicated that differences between the Ministry of Industries and the Ministry of Commerce regarding tariff structures have already slowed progress, making policy approval more challenging.
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To encourage investment in the EV sector, the Ministry of Industries has recommended several incentives, including a 1 percent customs duty on imported EV-specific components for the first three years, sales tax exemptions on imported parts, and tax relief on locally assembled electric vehicles for up to five years. The proposal also includes exemptions from federal excise duty, capital value tax, and withholding tax on EV sales.
However, Finance Ministry officials say the IMF prefers maintaining the standard 18 percent sales tax across all vehicle categories and providing support through direct subsidies rather than reduced tax rates. This approach aligns with the IMF’s broader objective of preserving tax revenues while allowing targeted financial assistance where needed.
The draft policy also focuses on increasing local manufacturing, with a target of achieving up to 85 percent domestic value addition in two- and three-wheelers, including electric vehicles, by 2030. At the same time, higher taxes on expensive fuel-powered vehicles are being considered to encourage a gradual transition toward environmentally friendly transportation.
The final outcome of these discussions will play a crucial role in shaping Pakistan’s future automotive and electric vehicle landscape.
