Budget 2025-26 – How New Taxes & Duties Will Impact Car Price in Pakistan

With each passing year, the federal budget comes up with a set of alterations which are bound to affect the already weak automotive industry in Pakistan. Every finance bill means a new burden on the industry in terms of new taxes, additional duties or raises in the existing levies-burdens, which also affect the small-car buyers. 

With Budget 2025-26 on the way, initial signs point to more of the same. In this article, offered by Wise Wheels Pakistan, we decode what is likely to be proposed by the finance ministry and what small- and big-car buyers should be bracing in the new fiscal year.

Sales Tax Increased on Small Cars

Presently, small cars, which have engine capacity of up to 850cc, are enjoying low sales tax of 10 to 12.5 percent. The government, however, is considering simplifying the process of taxation by abolishing this exemption and charging these vehicles under the normal bracket of 18 percent sales tax.

The said change, which is being contemplated via the amendments in the 8th Schedule of the Sales Tax Act of 1990, may end up making economic models much less affordable to ordinary Pakistanis. Should this measure go through, it would instantly increase the cost of cars in a market that is usually the default option among first-time car buyers or budget-conscious families.

Increased Withholding Tax on Large Cars

In bigger vehicles, the load may increase. There is also the withholding tax (WHT) structure, which is to be changed on cars exceeding 1300cc. The withholding tax imposed on automobiles currently that have engine capacity between 1,300cc to 1,600cc, is 2 percent of the overall value. 

Whereas the vehicles falling in 1601cc to 1800cc, are charged a tax of 3 percent and those falling in 1801cc to 2000cc are charged a tax of 5 percent. The tax rate imposed on vehicles that have engine size of between 2,001cc and 2,500cc is 7 percent. The vehicles with engine capacity of 2,501cc to 3,000cc are liable to a tax of 9 percent and those with more than 3,000cc engine capacity are subject to the top tax of 12 percent.

These rates are likely to go up board under the new proposal. This is after the government changed its tax structure in 2024 to a value-based system, which means that WHT will be based on the price of a car and not only on engine capacity. The policy shift implies that the buyers of luxury cars will be subjected to even higher taxes in the next fiscal year.

Budget 25-26 -New Additional Tax

The government is making a radical step toward achieving environmental change by suggesting a new tax on petrol and diesel-fuelled cars- between 3 percent to 5 percent. The reason is not simply generation of revenue. Rather, the tax is meant to start an ambitious Electric Vehicle Fund, which is likely to bring in Rs. 25 to 30 billion every year.

In five years, that fund would amass Rs. 125 to 150 billion and that money will go to subsidizing EVs, developing infrastructure, and developing and producing EVs locally. All traditional fuel cars, whether imported or locally assembled will be under this new tax umbrella.

Effect on the Prices of Small Cars

The small car segment will also be affected by the proposed 1% NEV (New Energy Vehicle) adoption levy on cars with engine displacement of between 660cc to 1300cc. The table below indicates the anticipated increase/decrease in prices of popular models in the event that the levy is introduced.

Cash or Card at Fuel Price

The other exciting suggestion is to the fuel retail industry. The government is opting to make the fuel have a different price depending on how it is paid. Online payments (through cards, mobile applications, or QR codes) would not have a reduction in the sales tax, which is 18 percent. Nevertheless, cash payers may be obliged to pay an extra Rs. 2-3 per liter.

The action will help to shift a large part of the transactions into the formal economy and promote tax transparency. In facilitating this transition, the law is shortly to oblige all petrol stations to accept digital payment, thus making fuel payment more technological across the country.