Budget 2025-26 – Expected Taxes & Duties on Automotive Industry

Every year, the federal budget introduces a series of changes that inevitably impact Pakistan’s already fragile automotive sector. With each finance bill, the industry sees an added burden in the form of new taxes, increased duties, or hikes in existing levies—pressures that also hit small-car buyers. As Budget 2025–26 approaches, early indications suggest more of the same. In this article, we break down the expected proposals from the finance ministry and what both small- and big-car buyers should prepare for in the coming fiscal year.

Sales Tax Hike on Small Cars

Currently, small cars with an engine capacity of up to 850cc enjoy a reduced sales tax rate of 10% to 12.5%. However, the government is looking to streamline taxation by eliminating this exemption and bringing these vehicles under the standard 18% sales tax bracket.

This change, being considered through amendments to the 8th Schedule of the Sales Tax Act, 1990, could make budget-friendly models significantly less accessible for average Pakistanis. If passed, this measure would immediately raise car prices in a segment that’s typically the go-to for first-time buyers or families on a tight budget.

Higher Withholding Tax on Big Cars

For larger vehicles, the burden could get heavier. The withholding tax (WHT) structure is also expected to change for cars above 1300cc. Currently, the withholding tax on cars with engine sizes ranging from 1,300cc to 1,600cc, is 2% of the total value. Wheras  the vehicles between 1,601cc and 1,800cc are taxed at 3%, while those in the 1,801cc to 2,000cc range are taxed at 5%. For vehicles with engine sizes between 2,001cc and 2,500cc, the tax rate is 7%. Cars with engine capacities from 2,501cc to 3,000cc face a 9% tax, and those with engines above 3,000cc are taxed at the highest rate of 12%.

Under the new proposal, these rates are expected to increase across the board. This follows the government’s 2024 shift to a value-based tax model, where WHT is tied to a vehicle’s price rather than just engine capacity. The policy change means luxury car buyers will face even steeper taxes in the coming fiscal year.

Budget 2025-26 —New Additional Tax 

In a bold move toward environmental reform, the government is proposing a new tax on petrol and diesel-powered vehicles—ranging from 3% to 5%. The rationale isn’t just revenue generation. Instead, the tax is intended to seed an ambitious Electric Vehicle Fund, expected to raise Rs. 25 to 30 billion annually.

Over five years, the fund could accumulate Rs. 125 to 150 billion, which would be used for EV subsidies, infrastructure development, and localized EV research and production. Whether imported or locally assembled, all conventional fuel cars will fall under this new tax umbrella.

Fuel Price: Cash vs. Card

Another interesting proposal targets the fuel retail sector. The government is considering differential pricing for fuel based on the payment method. Digital payments—via cards, mobile apps, or QR codes—would maintain the standard 18% sales tax. However, those paying in cash could face an additional Rs. 2–3 per liter surcharge.

This move aims to push more transactions into the formal economy and enhance tax transparency. To support this shift, all petrol stations will soon be legally required to offer digital payment options, making fuel payments more tech-friendly nationwide.

With the budget announcement just hours away, all eyes will be on the finance minister’s speech today. We’ll be back with updates once the official document is released—so stay tuned for the confirmed tax structure and its real-world impact.