LAHORE: In a major bid to rescue a stagnant automotive industry and provide relief to middle-class buyers, the government has drafted a sweeping five-year auto policy (2026–31) that features aggressive reductions in import duties and taxes.
The proposed framework of the five-year auto policy 2026–31 revealed a massive 53 per cent reduction in the overall tax burden on vehicles with engine capacities up to 1800cc. Currently, these mid-tier and economy vehicles face an astronomical combined duty and tax rate of 156 per cent, but under the new plan, that cumulative figure will drop to a flat 74 per cent.
The move comes after prolonged stagnation in the domestic passenger car market, where soaring retail prices have priced out the traditional middle and upper-middle-class consumer base. By targeting high-volume segments, specifically popular hatchbacks and compact sedans, policymakers hope a sharp drop in final retail prices will breathe life back into local automotive dealerships.
Beyond the overarching tax cuts, the proposed policy introduces a graduated relief scale for customs duties based strictly on engine capacity, aimed at lowering entry barriers for smaller, more fuel-efficient cars.
For the mass market, customs duties on motorcycles and vehicles under 850cc will drop from 50 per cent to 30 per cent, bringing their total cumulative tax burden down to 42 per cent from the current 66 per cent.
The remaining engine categories will see a similar cascading reduction. For vehicles in the 850cc to 1000cc bracket, customs duties are planned to decrease from 55 per cent to 35 per cent. In the mid-range 1000cc to 1500cc category, customs duties decline from 60 per cent to 40 per cent, while total combined taxes plummet from 76 per cent to 52 per cent. For larger family vehicles between 1500cc and 1800cc, customs duties decrease from 75 per cent to 45 per cent, with total taxes settling at 57 per cent, down from 91 per cent.
Surprisingly, the sharpest single regulatory adjustment targets high-end luxury imports. For vehicles exceeding 1800 cc, the government plans to slash customs duties by half, from 100 per cent to 50 per cent.
The industry analysts view this aggressive luxury cut as an attempt to formalise the high-end market, capturing revenue from luxury vehicles that previously slipped into the country through tax-evading channels.
The policy also seeks to carefully rebalance the domestic manufacturing ecosystem by cutting customs duties on imported auto parts from 35 per cent to 25 per cent. While this provides immediate cost relief to domestic Original Equipment Manufacturers (OEMs), the warning adds to concerns among local vendor industries, who will see their protection margins significantly diminished.
Meanwhile, specialised heavy equipment and niche commercial vehicles will retain a 30 per cent tariff barrier to protect local specialised assemblers. On the green mobility front, the framework establishes a sharp line between everyday commuters and luxury buyers.
Mass-market electric vehicles priced under $75,000 or Rs20 million will enjoy a 0 per cent Federal Excise Duty (FED) to curb the national fuel import bill, while luxury electric vehicles crossing the Rs20 million threshold will face the full tax to ensure elite consumers contribute to the national exchequer.
If finalised and implemented, the policy is poised to trigger intense price wars among established local assemblers and potentially make the country an attractive destination for new foreign automakers. However, the ambitious plan presents a delicate fiscal tightrope, as the Federal Board of Revenue (FBR) will almost certainly face a substantial short-term revenue shortfall from the slashed tariffs.
