Budget for fiscal year 2025-26 is just around the corner, and consumers planning to buy a car are anxiously waiting to see what it brings—whether there will be any relief or yet another hike in taxes and duties pushing car prices even higher. Every year, the fiscal budget includes key updates for the auto sector, often involving changes in sales tax, withholding tax, regulatory duty (RD), additional customs duty (ACD), and more.
This year seems no different. As the budget approaches, news reports are already painting a grim picture for car buyers. About a week ago, it was reported that the Federal Board of Revenue (FBR) is considering increasing the withholding tax (WHT) on cars with engine sizes over 1,300cc. And now, the latest update reveals that even smaller cars—those with engine capacities up to 850cc—may soon face higher sales tax.
New Sales Tax for Small Cars?
Right now, small cars with engine capacity up to 850cc are taxed at a reduced rate of 12.5%. But under the new proposal, this could rise to the standard sales tax rate of 18%. The move is part of the government’s larger plan to boost revenue by eliminating tax exemptions and bringing all items under uniform tax rates.
The FBR is currently reviewing this proposal, which involves amending the 8th Schedule of the Sales Tax Act 1990. If approved, it would mean an automatic price hike for budget-friendly cars—making them less accessible for average buyers.
To offset some of the pressure, discussions are also ongoing about possibly easing import restrictions on used cars. The government may allow used cars up to five years old to be imported, which could give consumers more affordable alternatives, especially if new car prices continue to rise.
Higher Tax on Big Cars Too
The government is not just targeting small cars. Bigger vehicles—with engine sizes over 1,300cc—might also be hit with higher withholding taxes. These taxes are already applied based on engine size, and the proposed changes suggest even higher rates are on the way.
Here’s the current WHT structure:
- 2% tax for 1,300cc–1,600cc
- 3% for 1,601cc–1,800cc
- 5% for 1,801cc–2,000cc
- 7% for 2,001cc–2,500cc
- 9% for 2,501cc–3,000cc
- 12% for cars above 3,000cc
These may soon go up, adding more cost to owning a mid- or large-sized car.
These proposals are part of a broader effort to simplify tax systems and increase revenue. In 2024, the FBR collected over Rs4 billion in vehicle-related taxes after switching to a value-based tax model. Now, they’re aiming for even more revenue in 2025-26 by adjusting these tax structures further.
What Should Car Buyers Do?
If you’re thinking about buying a car—especially a smaller one—it might be wise to act before the budget announcement. Prices could go up quickly if these changes are approved. For those considering larger or imported cars, stay tuned for the final budget to make the best decision.
