Pakistan’s Auto Industry 2026–31: Tariff Reforms, Imports, and Industry Divide 

With the current auto policy set to expire in June 2026, Pakistan’s automotive industry is on the brink of a massive transformation. The government is drafting a new Auto Industry Policy 2026-31, one that promises to reshape the sector by focusing on market-driven reforms, reducing tariff protections, and enhancing competition. 

However, with key stakeholders pulling in different directions and adding substantial risk, what can consumers and industry players expect from the new policy?

Key Changes in the New Auto Policy

Tariff Reforms

• New Customs Duty Structure:
  • Over the next 5 years, duties on finished vehicles will be capped at 15%.

  • New 4-slab system for customs duties: 0%, 5%, 10%, 15%.

• Phase-out of Additional Customs Duty (ACD) and Regulatory Duties (RD):
  • Aimed at easing imports and potentially lowering prices.

• Surcharge on Used Vehicle Imports:
  • 40% tariff on used vehicles for FY 2026, gradually decreasing to parity by 2030.
    

Duty Slab	Customs Duty
0%	Certain imports
5%	Locally sourced parts
10%	Finished vehicles
15%	Premium vehicles

 

Used Vehicle Imports

• Imports Allowed for Overseas Pakistanis: More affordable options for consumers, but concerns from local manufacturers.

• Impact: Increased competition for local manufacturers already dealing with high production costs and import duties.

• FY 2023 Stats:
  • Imported vehicles: PKR 345 billion

  • Vehicle exports: PKR 21 billion

The Problem With The New Auto Policy

Suppose the government reduces tariffs hastily without building local capacity (i.e., by offering low-interest loans or grants to upgrade and meet global standards). In that case, the risk of industry disruption (plant closures and job losses) will be alarming.

Secondly, the policy regarding used-vehicle imports lacks clarity on safeguards: how will undervaluation be prevented, how many imports will be allowed, and how will it affect local assembly and the parts supply chain? 

PAAPAM’s Warning:

• The parts sector could lose PKR 48–60 billion annually.

• Local parts manufacturers may be at risk of collapse due to increased competition.

Industry Division: Assemblers vs Parts Manufacturers

A clear divide has emerged between automakers (assemblers) and parts manufacturers over the industry’s future direction.

Assemblers’ Proposal

• Goal: Reduce duties on Completely Knocked Down (CKD) kits and local parts to 10%.
• Benefits: Lower production costs, reduced vehicle prices, increased competition.

Parts Manufacturers’ Stance

• Goal: Keep duties on CKD kits and parts higher—up to 35%.
• Benefits:
  • Protect local manufacturing jobs and ensure the availability of locally sourced components.

Who Benefits and Who Pays?

Group	Benefits	Risks
Assemblers	Lower costs, reduced vehicle prices, increased market share.	Reduced protection for local jobs and components.
Consumers	More affordable vehicles, more choice, competitive pricing.	Potential lower-quality local parts.
Parts Manufacturers	Support for employment and local supply chains.	Potential for job losses and reliance on imports.

 

The Challenge: Balancing Protectionism with Competitiveness

• Current Situation: Protectionist measures helped build local parts manufacturing, but hindered global competitiveness.

• Needed Shift: Local manufacturers must adapt to new technologies and reduce costs to stay competitive.

Possible Solutions:

• Lower duties on locally sourced parts meeting quality and volume standards.

• Gradually reduce duties on imports to give local manufacturers time to adjust.

• Provide support for parts manufacturers via capacity-building programs and export incentives.

Lessons From Around The World

Policymakers should note that countries that have previously been successful in liberalizing their auto sectors did so with strategic thought:

• India became a global hub for small-car production by offering incentives to local manufacturers and reducing tariffs, while gradually expanding exports.
• Mexico leveraged the North American Free Trade Agreement (NAFTA) to integrate itself into global supply chains. It is now a top auto exporter.
• Thailand offered consistent policies and localisation incentives. It is now known as the “Detroit of Asia”

Key Takeaways For Policymakers

• Gradual Tariff Reduction: Lower duties in phases (10-15 years) while supporting local capacity building.
• Localization Incentives: Offer tax breaks and grants to increase local parts manufacturing to 80%~90% in existing vehicles and/or to initiate EV assembly.
• Stable Policy Framework: Ensure consistency in auto policy to attract long-term investment.

Looking Ahead: What’s Next for Pakistan’s Auto Industry?

While the road ahead may be challenging for some players, the shift in focus to global competitiveness, consumer choice, and affordable pricing promises significant benefits for car buyers.