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By Sabeeh Zanair :
Government preparing investor-focused strategy as proposed sales tax relief for small cars faces IMF opposition
The Pakistani government will consult the International Monetary Fund (IMF) before finalising tax measures included in its upcoming automotive policy, according to officials familiar with the matter.
The discussions come after the IMF reportedly objected to a proposal to reduce the sales tax on 800cc vehicles from 18% to 12.5%, citing concerns over its potential impact on government revenue.
The proposed auto policy is being developed under the direction of Prime Minister Shehbaz Sharif, who has instructed relevant ministries to prepare a framework aimed at attracting new investment and strengthening Pakistan’s automotive industry.
Focus on investment and local manufacturing
Officials say the new policy is expected to encourage domestic and foreign investment, increase local vehicle production and generate employment across the automotive value chain.
The government also plans to promote localisation by encouraging manufacturers to produce more vehicle components within Pakistan, reducing reliance on imported parts and supporting the country’s industrial base.
Industry stakeholders have long called for a stable and predictable policy environment to help expand production capacity and attract global automakers.
Vehicle safety standards to be upgraded
In addition to investment incentives, the proposed policy aims to bring locally manufactured vehicles closer to international safety standards.
Officials say aligning Pakistan’s automotive regulations with global benchmarks could improve vehicle quality, enhance road safety and make locally assembled vehicles more competitive in export markets.
The move is also expected to encourage manufacturers to adopt modern technologies and improve compliance with evolving international automotive requirements.
Tax proposals to be reviewed with IMF
Before the policy receives final approval, the government is expected to discuss its proposed tax incentives and exemptions with the IMF.
Pakistan remains under an IMF-supported economic reform programme, meaning significant fiscal measures—particularly those affecting tax revenues—are likely to require consultation with the lender.
The reported proposal to lower the sales tax on smaller vehicles is intended to make entry-level cars more affordable. However, officials say the IMF has expressed reservations about reducing indirect tax collections at a time when Pakistan is working to strengthen its public finances.
Carbon tax under consideration
Sources also indicate that the government is evaluating the introduction of a carbon tax on petrol-powered and hybrid vehicles as part of its broader climate and environmental strategy.
While details have yet to be finalised, the measure would aim to encourage cleaner transport technologies and reduce emissions from the road transport sector.
Analysts note that similar carbon-pricing mechanisms are being adopted by countries seeking to balance industrial growth with environmental commitments.
Industry awaits final policy
Pakistan’s automotive sector has faced several challenges in recent years, including high production costs, import restrictions, exchange rate volatility and declining consumer purchasing power.
Industry representatives hope the new auto policy will provide long-term certainty, encourage investment and support the expansion of local manufacturing.
The final framework is expected to be announced after consultations with the IMF and other stakeholders, with officials aiming to introduce measures that promote growth while remaining consistent with the country’s fiscal and economic reform objectives.
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