Islamabad, 6 June 2025: Tax Hike on Small Cars has been set aside by federal authorities ahead of the new budget, with senior officials confirming that there will be no increase in the sales tax applied to locally produced or assembled vehicles with engine capacities up to 850cc.
The move comes after weeks of speculation and internal deliberations regarding potential revisions to the auto sector’s tax structure.
Insiders familiar with the matter revealed that earlier recommendations to raise the sales tax on compact vehicles from the current 10–12.5% to as much as 15–18% have now been formally dismissed. This decision is expected to provide relief to middle-income car buyers and sustain local demand in the entry-level vehicle segment.
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Industry experts suggest that the Federal Board of Revenue (FBR) may retain Entry No. 72 of the Eighth Schedule of the Sales Tax Act, 1990 an item that ensures continued tax concessions for smaller vehicles assembled within Pakistan.
By preserving this clause, the government appears to be supporting domestic manufacturers and shielding consumers from further inflationary pressure.
However, while the Tax Hike on Small Cars has been paused, the government faces fresh fiscal demands from the International Monetary Fund (IMF), which has called for the introduction of a carbon levy in the upcoming federal budget.
The proposed levy would target fuel consumption specifically petrol and diesel and internal combustion vehicles above the 850cc threshold.
According to IMF projections, such a levy could generate more than Rs. 25 billion annually by taxing fossil fuel-based transport.
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The plan, which is still under review, is expected to be finalized early next week as negotiations between Islamabad and the IMF continue ahead of the budget announcement.
As the government navigates competing economic pressures, including revenue generation and public affordability, analysts note that balancing environmental goals with consumer protection will remain a delicate task.
For now, the decision to hold off on a Tax Hike on Small Cars may provide temporary relief to car buyers but fiscal challenges loom large in the broader automotive and energy sectors.
