The federal budget for 2025-26, presented by Finance Minister Muhammad Aurangzeb, marks a significant shift in how Pakistan’s automotive industry will be taxed and incentivized in the coming years. With the government focusing on revenue generation, environmental sustainability, and reduced dependency on fossil fuels, the new budget introduces a range of taxes, levies, and policy reforms that directly impact both manufacturers and consumers.
Here’s a comprehensive overview of what Budget 2025-26 brings for the Pakistani car industry.
New Green Tax
In a major policy change, the federal government has officially introduced a new Green Tax on internal combustion engine (ICE) vehicles—targeting both locally assembled and imported cars. This move is seen as a dual-purpose strategy: increase government revenues and push the market towards electric and alternative fuel vehicles.
The levy is calculated as a percentage of the vehicle’s value and already includes all applicable duties and taxes, which simplifies the cost structure. The rates vary by engine size and vehicle origin (local vs imported):
- Small Engines (Under 1300cc):
- Locally Assembled or Imported: 1% of the car’s price.
- Example: A Rs. 1,000,000 vehicle = Rs. 10,000 levy.
- Mid-Range Engines (1300cc to 1800cc)
- Locally Assembled or Imported: 2% of the car’s value.
- Large Engines (Above 1800cc)
- Locally Assembled or Imported: 3% of the car’s value.
- Buses and Trucks (Commercial Vehicles)
- All Types: 1% levy on both imported and locally made.
This levy will directly affect vehicle prices and business margins for manufacturers and importers, especially those focusing on mid to high-end ICE vehicles.
GST Hike: 18% on Smaller Cars
In the 2025-26 federal budget, the government has proposed a significant increase in the General Sales Tax (GST) for smaller vehicles—raising it from 12.5% to 18% for cars with engine capacities up to 850cc. This change will predominantly affect the Suzuki Alto, which is currently the only locally assembled vehicle in this segment.
While the GST hike alone is substantial, the overall cost increase is further compounded by the 1% environmental levy introduced on internal combustion engine (ICE) vehicles. As a result, potential buyers of the Suzuki Alto could see a price hike ranging between Rs. 163,000 and Rs.186,446, depending on the variant.
Carbon Levy on Fuel
Another major policy shift set to affect consumers is the introduction of a Carbon Levy on fossil fuels. This levy will apply to petrol, high-speed diesel (HSD), and furnace oil, leading to a direct increase in operational costs for all vehicle owners. The government has structured this levy to be implemented in phases: Rs. 2.5 per liter in FY 2025-26 and rising to Rs. 5 per liter in FY 2026-27.
The primary aim of this measure is to discourage the consumption of fossil fuels and redirect funds toward the development of eco-friendly infrastructure.
Reduction in RD, CD & ACD
A substantial shift has been announced in terms of import duties:
- Regulatory Duty (RD):
- Maximum rate slashed from 90% to 50%
- RD removed entirely from 554 PCT codes
- RD reduced on 559 PCT codes
- Additional Customs Duty (ACD):
- Also reduced on numerous tariff lines
- Long-Term Goal: Phased elimination of RD and ACD by 2030
While this is a welcome move for importers and might lower the cost of imported parts and vehicles, it could undermine local manufacturing, which has traditionally been protected through high import barriers.
New Energy Vehicle (NEV) Policy
In a push toward environmental sustainability, the government is finalizing a New Energy Vehicle (NEV) Policy focused primarily on two- and three-wheeled electric vehicles. Key elements include:
- Promoting local EV assembly
- Imposing levies on the sale/import of petrol and diesel-powered alternatives
- Encouraging a transition away from imported fossil fuels
While the NEV policy is still under development, it’s evident that electric vehicles are the future focus, and conventional fuel vehicles may become more expensive and less attractive over time.
Summary of Key Fiscal Changes
| Tax/Levy | Scope | Rate | Impact |
| Green Levy on ICE Vehicles | All ICE cars (local + imported) | 1–3% | Price hike for ICE vehicles |
| GST on <850cc Vehicles | Suzuki Alto (mainly) | From 12.5% → 18% | Rs. 160k+ price increase |
| Carbon Levy on Fuel | Petrol, Diesel, Furnace Oil | Rs. 2.5/l (FY26), Rs. 5/l (FY27) | Higher fuel costs |
| Reduction in RD/ACD | Imported goods & components | RD down to 50% max | Boost to importers, concern for local industry |
| NEV Policy (In Progress) | Focus on 2–3 wheeled EVs | N/A | Long-term push for EVs |
The 2025-26 federal budget signals the beginning of a fundamental transformation in Pakistan’s automotive sector. While consumers may feel the pinch from higher car and fuel prices, the broader vision is aimed at reducing environmental impact and modernizing the transport sector.
Manufacturers, meanwhile, will need to navigate higher production costs and rethink strategies as the government reduces protectionist duties while nudging the industry toward electric mobility.
Whether these policies succeed will depend on how quickly infrastructure, incentives, and affordability align with the vision for a greener automotive future in Pakistan.
