IMF rejects Pakistan’s 1% sales tax proposal for new energy vehicles

The International Monetary Fund (IMF) has not accepted Pakistan’s proposal to impose 1% sales tax on new energy vehicles, including electric vehicles, creating uncertainty over the finalisation of the Auto Policy 2026-31, The Express Tribune reported. 

Sources said the government proposed on Thursday that sales tax on hybrid vehicles be fixed at 50% of the standard 18% rate, while new energy vehicles be charged 1% sales tax.

Finance ministry officials said the IMF rejected reduced sales tax rates for all vehicles, including electric vehicles, and wanted the standard sales tax rate to apply. The lender suggested that any price relief should be given through direct subsidies.

The officials said the lender sought further clarification. 

The Auto Policy 2026-31 has also been delayed by differences between the Ministry of Commerce and the Ministry of Industries and Production over the duty structure. Sources said internal meetings, including those chaired by Deputy Prime Minister Ishaq Dar, remained inconclusive.

The Ministry of Commerce is responsible for the National Tariff Policy, while the auto policy falls under the Ministry of Industries and Production. The auto policy must align with the National Tariff Policy, which is in its second year of implementation.

The delay has made it difficult to finalise the Auto Policy 2026-31 before June 24. Any changes in sales tax and import duties must be incorporated in the budget, which the National Assembly is expected to pass on Wednesday. The existing auto policy expires this month.

According to sources, the Ministry of Industries and Production proposed 1% customs duty on new energy vehicle-specific parts for three years and 5% from the fourth year onward. It also proposed exempting sales tax on imports of these parts during the policy period.

The ministry also proposed 1% sales tax on the local supply and sale of new energy vehicles for five years, along with exemption from federal excise duty, capital value tax and withholding tax.

A key dispute is over import duties. The Ministry of Industries and Production wants higher duties on locally assembled vehicles, while the Ministry of Commerce wants to implement the National Tariff Policy, under which the maximum customs duty will be capped at 15% by 2030.

Under the cabinet-approved tariff path, customs duties of 20% to 50% in 2026-27 will be reduced to 15% by 2030. The current 20% duty slab will fall to 10%, while the 15% slab will be reduced to 5%.

The draft policy also proposes localisation of up to 85% domestic value addition for two- and three-wheelers, including L6 and L7 category electric vehicles, by 2030.

Companies failing to meet localisation targets would lose tariff concessions and be suspended from policy benefits.

To encourage new energy vehicles, the Ministry of Industries and Production has proposed levies on combustion engine cars, including 5% on vehicles worth Rs15 million to Rs20 million, 10% on Rs20 million to Rs25 million, and 15% on vehicles above Rs25 million.

The draft policy also recommends locking the maximum depreciation rate at 30% for all used vehicles imported into Pakistan, including vehicles older than three years but not older than 50 years from their original manufacturing date.

It further proposes a gradual phase-out of SRO 655, SRO 656 and SRO 693, along with related exemptions under the Fifth Schedule of the Customs Act, 1969, by 2030.

The Ministry of Industries and Production says the phase-out, starting July 1, 2026, will help bring the weighted average applied tariff below 6% by June 2030.