Tax Alert: 850cc Cars Face New Price-Based Levy

The upcoming budget for the year 2025-2026 is around the corner, and people hoping to buy a new car are keeping a keen eye to see what it will bring. They are really curious about whether car prices will finally decrease or if taxes will rise again. Every year, the budget revises the rules and policies for cars, often adjusting sales tax, upfront taxes (withholding tax (WHT)), and various import duties, such as RD and ACD.

This year looks similar to the previous ones. As the budget date approaches, news reports are already causing concern among car buyers. A week ago, rumors suggested that the Federal Board of Revenue (FBR) might raise the withholding tax (WHT) on larger cars, specifically those with an engine power larger than 1300cc, such as many sedans and SUVs. As of this moment, the most recent information indicates that even more compact automobiles, which have an engine capacity of up to 850cc, may soon be subject to a higher sales tax, causing concern among many potential buyers who are anxious about their plans.

Will Small Car Taxes Rise in Pakistan’s New Budget?

Currently, small cars with an engine capacity of up to 850cc are taxed at a reduced rate of 12.5%. However, under the consideration of the new proposal, this could rise to the standard tax rate of 18%. This move outlines the government’s broader plan to increase revenue by eliminating tax exemptions and applying uniform tax rates to all items.

The FBR is currently reviewing this proposal, which involves amending the 8th Schedule of the Sales Tax Act 1990. If approved, it would mean an automatic price hike for budget-friendly cars, making them less accessible to average buyers.

To offset some of the pressure, discussions are also ongoing about possibly easing import restrictions on used cars. The government may allow the importation of used vehicles up to five years old, which could provide consumers with more affordable alternatives, especially if new car prices continue to rise.

High-Engine Cars Hit with Steep Tax Hike in Pakistan

The government isn’t only focusing higher taxes on small cars. Larger vehicles could also see increased prices. Specifically, those with an engine capacity greater than 1300cc may see higher withholding taxes. Taxes are already imposed on engine sizes, and the proposed changes indicate that these rates may increase even further.

Here is the current withholding tax structure;

• 2% tax for 1,300cc–1,600cc
• 3% for 1,601cc–1,800cc
• 5% for 1,801cc–2,000cc
• 7% for 2,001cc–2,500cc
• 9% for 2,501cc–3,000cc
• 12% for cars above 3,000cc

These could potentially increase soon, leading to higher expenses for owning a mid- or large-sized vehicle.

These proposals are a key piece of a larger initiative aimed at streamlining tax systems and boosting revenue. In 2024, the FBR successfully gathered more than Rs4 billion in vehicle-related taxes by transitioning to a value-based tax model.  They’re setting their sights on boosting revenue even further in 2025-26 by fine-tuning these tax structures even more.

Car Buying in 2025: What You Need to Know

If you are planning to buy a car, especially a smaller model with an engine size of up to 850cc, now might be the time to act before the budget is depleted and taxes are imposed. Prices could increase rapidly if new rules and proposals are passed. For those eyeing larger or imported cars, it’s smarter to hold off and wait for the final budget details.