Proposed 18% sales tax may slow Pakistan’s auto market recovery

KARACHI: Pakistan’s automobile industry is facing the prospect of slower sales growth as the government considers imposing an 18% sales tax on all vehicle categories, a move industry officials say could significantly raise prices and dampen consumer demand.

According to industry sources, the proposed tax would apply across the board to electric vehicles (EVs), plug-in hybrid electric vehicles (PHEVs), range-extended electric vehicles (REEVs), hybrid vehicles and conventional petrol-powered cars.

The measure would effectively reduce the tax incentives that have supported the adoption of electric and hybrid technologies, resulting in notable increases in retail prices.

Market estimates indicate that prices of EVs, PHEVs and REEVs could increase by approximately 17%, while hybrid vehicles may become around 10% more expensive.

Industry officials said the additional tax burden is expected to be passed on directly to consumers, leading to higher showroom prices once the policy is implemented.

Analysts warned that rising vehicle prices could weaken demand in a market already constrained by limited purchasing power and relatively high financing costs.

“Pakistan’s automobile market remains highly price-sensitive, and double-digit price increases have historically resulted in lower sales volumes,” an industry analyst said.

The analyst noted that electrified vehicle segments may face the greatest impact, as buyers often offset higher purchase costs through tax incentives and lower operating expenses.

The proposal comes as Pakistan’s auto sector continues to recover from a prolonged downturn triggered by high interest rates, import restrictions and subdued consumer confidence.

Industry experts cautioned that while the measure could help the government increase tax revenues, it may also slow the pace of growth in vehicle sales and hinder efforts to encourage cleaner transportation technologies.

“The policy may generate additional revenue in the short term, but it risks reducing overall demand and slowing the transition toward electric mobility,” the analyst said.

Automakers, dealers and investors are awaiting details in the upcoming federal budget and finance bill, which are expected to clarify the proposed tax structure and implementation mechanism.

Market participants believe the final decision will have a direct impact on vehicle pricing, sales forecasts and the outlook for Pakistan’s automobile industry in fiscal year 2027.

Despite these concerns, the sector has shown signs of strong recovery. According to Pakistan Automotive Manufacturers Association (PAMA) data, sales of cars, light commercial vehicles, vans, jeeps and electric vehicles reached 22,000 units in April 2026, marking a 108% increase compared with the same month a year earlier.

For the first 10 months of fiscal year 2026, total vehicle sales rose 49% to 166,100 units, driven by improved consumer demand, continued auto financing activity and stronger sales across key vehicle segments.