Locally manufactured cars with up to 850cc engine capacity may face standard 18% sales tax

The government is considering imposing a standard 18% sales tax on locally manufactured or assembled cars with an engine capacity of up to 850cc in the upcoming budget for fiscal year 2025-26, BR reported. 

This move is part of the government’s broader strategy to increase revenue for fiscal year 2025-26 by reviewing all sales tax exemptions and lowering tax rates, aiming to align them with the standard 18% rate.

The Federal Board of Revenue (FBR) is currently reviewing the budget proposal, which suggests amending the 8th Schedule of the Sales Tax Act 1990. 

At present, motorcars with engine capacity up to 850cc are taxed at a reduced rate of 12.5%. If the proposal is approved, FBR would delete entry number 72 of the 8th Schedule, bringing these vehicles in line with the standard sales tax rate.

The proposal also includes potential changes to the importation rules for used vehicles, with discussions underway about allowing the import of five-year-old used cars.

The amendment to the Sales Tax Act would ensure that goods specified in the Eighth Schedule are subject to tax at the rates and conditions outlined, as per the provisions of the Sales Tax Act 1990.

Earlier, it was reported that the FBR has proposed an increase in the Withholding Tax (WHT) rates for vehicles with engine capacities exceeding 1,300cc.

Currently, the WHT rates are set at 2% for vehicles with engine capacities between 1,300cc and 1,600cc, 3% for vehicles between 1,601cc and 1,800cc, 5% for vehicles between 1,801cc and 2,000cc, 7% for those between 2,001cc and 2,500cc, 9% for vehicles between 2,501cc and 3,000cc, and 12% for vehicles above 3,000cc. 

The proposed changes would raise these rates across the various categories to increase tax revenue.

The move follows last year’s shift to a value-based taxation model, which replaced fixed advance taxes with levies linked to vehicle prices. 

In 2024, the FBR collected more than Rs4 billion in withholding taxes from vehicles. With the proposed tax hikes, the FBR expects significant revenue growth in the coming fiscal year.