Pakistan Prime Minister Shehbaz Sharif has approved the Automotive and Auto Parts Manufacturing Policy 2026-31, a five-year framework covering local manufacturing, exports, competition and electric mobility.

The government has rejected an International Monetary Fund (IMF) proposal to impose an 18% sales tax on electric vehicles (EVs). The policy also provides for phased tariff reductions, revised taxation measures and changes to vehicle financing.

Shehbaz convened a meeting on October 20th to review the policy. The Prime Minister had previously tasked an inter-ministerial committee, headed by the law minister, with reviewing and finalising the draft. The committee recommended amendments, including a restructuring of Pakistan's automotive sector.

The previous automotive policy expired on June 30th, 2026. The absence of a replacement policy left manufacturers and consumers awaiting details of the government's plans for the industry. The delay created uncertainty among automakers, prompting them to postpone decisions concerning production and vehicle prices.

The approved framework sets out measures to increase the use of locally manufactured auto parts in global supply chains, attract investment, increase local value addition and improve the international competitiveness of domestic manufacturers. It also establishes a longer-term framework for business investment and manufacturing decisions.

Tariff reductions and EV taxation

The policy provides for phased reductions in automotive import duties, with tariffs scheduled to decline to 15% by fiscal year 2030-31. For eligible imported electric cars priced at up to US$ 75,000, customs duty is scheduled to fall from 50% to 25% initially and then to 15% by fiscal year 2030-31. The reductions will be implemented in phases during the policy period.

Additional tariff reductions are proposed for smaller EVs priced below US$ 15,000. These measures will alter the import duty structure applicable to vehicles in different price segments.

The government has rejected the IMF's proposal to impose an 18% sales tax on EVs. Under the approved framework, battery electric vehicles (BEVs) will attract a 1% sales tax from 2026 to 2031. Range-extended electric vehicles (REEVs) will be subject to a 6% sales tax, while a 9% sales tax on plug-in hybrid electric vehicles (PHEVs) has also been approved. The policy also proposes a 10% Federal Excise Duty (FED) on EVs valued above US$ 75,000. The tax structure differentiates between vehicle categories and price segments.

EV financing and consumer affordability

The government plans to increase the financing limit for EV purchases from PKR 3 million to PKR 10 million (US$ 10,870-36,230). The maximum repayment period will be extended from three years to five years. These financing changes, together with lower import duties on eligible electric cars, are intended to reduce the financial barriers to purchasing smaller vehicles, particularly for low-income consumers. The effect on vehicle affordability will depend on the implementation of the financing arrangements and the final rules governing taxation and incentives.

Export targets and incentives for manufacturers

The policy sets a target of increasing Pakistan's overall vehicle exports to US$ 6 billion. Auto parts manufacturers will be expected to increase their exports to US$ 1.2 billion by fiscal year 2030-31.

Vehicle manufacturers will also be subject to mandatory export targets. Companies that meet the requirements may receive a rebate equivalent to 5% of their export value, along with an additional 10% incentive for exports exceeding the previous year's figures.

The framework provides for penalties against companies that fail to meet their export commitments. Manufacturing certificates may be cancelled if a company misses its targets for two consecutive years. Incentives may also be withdrawn from manufacturers that fail to achieve their local production targets.

The policy includes measures to increase the participation of domestic auto-parts suppliers in global value chains and address requirements relating to production capabilities, technology and product competitiveness.

Automotive Development Levy and industry investment

The government plans to impose an Automotive Development Levy on vehicles with engine capacities exceeding 1,000cc. It projects collecting more than PKR 232 billion through the levy over five years. The funds are intended to support export incentives, industrial development programmes, technology upgrades for auto-parts manufacturers, and research and certification initiatives. The government also plans to establish the Pakistan Automotive Testing Institute.

Legislation concerning the Automotive Development Levy is scheduled for completion by December 2026.

Safety standards, audits and workforce development

The policy proposes adopting international safety standards for locally manufactured and imported vehicles. Consumer protection clauses will also be incorporated into agreements between automotive companies and buyers.

The government plans to introduce audits twice a year across the automotive sector. Third-party audits will also be conducted to verify payments relating to local production and export incentives. The policy includes training targets for developing a workforce to meet the automotive industry's manufacturing and technological requirements.

The five-year policy covers domestic production, exports, investment, technology upgrades, electric mobility and vehicle financing. Implementation will depend on the rules governing tariffs, taxation, export incentives, local production requirements and financing arrangements.