Just a week ago, Finance Minister Muhammad Aurangzeb presented the 2025-26 budget to the National Assembly. In his proposal, he suggested an increase in sales tax on small vehicles, including cars with engine capacities as low as 850cc. He also recommended raising the sales tax on hybrid cars up to 1800cc from the current 12.5% to 18%.
However, there’s an update on this proposed tax hike: the government has decided to withdraw the controversial proposal concerning small cars and hybrid vehicles, with the latter being viewed as particularly detrimental to the environment.
Senate Finance Committee continues Budget 2025–26 deliberations under Chairmanship of Senator Saleem Mandviwalla. A significant number of Senators presented recommendations for the Finance Bill. Federal Minister & Minister of State also in attendance. @Financegovpk pic.twitter.com/d4SngfMm3C
— ꜱᴇɴᴀᴛᴇ ᴏꜰ ᴘᴀᴋɪꜱᴛᴀɴ 🇵🇰 (@SenatePakistan) June 17, 2025
Tax Hike on 850cc Cars Under Fire
The Senate Standing Committee on Finance and Revenue, led by Senator Saleem Mandviwalla, held several sessions to discuss the Finance Bill 2025 and the proposed budget. The committee expressed serious concerns about the increase in GST on small vehicles, including 850cc cars.
Mandviwalla called the proposed 18% sales tax on a Rs. 3 million vehicle “unfair,” a sentiment echoed by several other senators. Some senators suggested lowering the sales tax to a more moderate rate of 14% or 15%.
Senator Shibli Faraz also criticized the inequity in the budget, pointing out that while tax relief was being extended to certain regions, small car owners were facing higher taxes. The committee’s strong opposition led to the government retracting the proposal to increase the sales tax on both small vehicles and hybrid cars.
Hybrid Tax Reversal
The government also announced that the sales tax on hybrid cars, which was set to rise from 12.5% to 18%, would remain at the current rate of 12.5%. This decision is expected to cost the government an estimated Rs7 billion in potential revenue.
The reversal came after the government had previously suggested a tax increase for hybrid vehicles earlier in the year but backed down before the budget was approved by the National Assembly. According to the current auto policy, the tax rate on hybrid cars cannot be raised before June 2026.
While the government had initially hoped to increase taxes to raise revenue, the pushback from the Senate shows the balancing act needed between raising funds and maintaining public support. The future of such tax proposals remains uncertain, but for now, car owners can breathe a sigh of relief.
