Govt Eyes New Car Taxes Above 1800cc, RD Relief at Risk
The Pakistani government is once again looking toward the auto industry as part of its revenue strategy. In a proposed mini-budget, authorities are considering new levies on luxury goods — including cars — to raise at least Rs. 50 billion for flood recovery.
At the same time, policymakers are also considering reinstating taxes on goods previously subject to reduced regulatory duties (RDs) as part of the IMF-guided trade liberalization plan. For the auto sector, this combination could be particularly disruptive.
The Mini-Budget in Context
Pakistan is facing a dual challenge: the aftermath of catastrophic floods and a fiscal crisis. The Federal Board of Revenue (FBR) has already fallen short of its tax target for July and August by Rs. 40 billion, with a deeper gap expected by the end of September.
To plug this gap, Finance Minister Muhammad Aurangzeb chaired a meeting to explore new measures. Among the key proposals:
- A 5% levy on imported electronics above a specific price range.
- Additional taxes on cars with engines above 1,800cc, typically considered luxury vehicles.
These measures are expected to generate quick funds, but they will likely weigh heavily on the auto sector and consumers alike.
Regulatory Duties (RDs) in Question
Beyond new levies, the government is also considering taxing goods that were previously subject to reduced RDs. Cars fall into this category.
If approved, this would mean:
- Imported cars could again face higher duties, which would raise their prices.
- Consumers would find fewer affordable options, as both locally assembled and imported vehicles become costlier.
- The move could create friction with the IMF’s trade liberalization framework, which encouraged the reduction of such duties in the first place.
For the local auto industry, this represents another layer of uncertainty, as frequent shifts in RD policies have long made planning and investment difficult.
Bigger Picture: A Policy Dilemma
This situation exposes a broader dilemma in Pakistan’s economic policy. Instead of widening the tax net, the government often falls back on indirect taxation of industries, such as the automobile industry. While this strategy delivers short-term revenue, it hampers long-term growth.
High prices discourage innovation in the sector, delay the shift toward hybrid and electric vehicles, and force consumers into the used car market as new cars become unaffordable.
The government’s stopgap approach to revenue collection risks stifling an industry that could otherwise make a meaningful contribution to Pakistan’s economic revival.
Final Thoughts
The proposed mini-budget once again highlights the precarious place of the auto industry in Pakistan’s economic strategy. Levies and potential RD-related taxes may deliver quick revenue, but they risk undermining long-term industry growth, discouraging investment, and alienating consumers.
Unless a coherent and stable auto policy is adopted, cars in Pakistan will continue to symbolize inconsistent policymaking, rather than a thriving automotive sector.