The government has agreed in principle to implement a Small Cars Tax Increase by raising the sales tax rate from 12.5 percent to 15-18 percent in the upcoming budget.
In a significant policy shift, the Pakistani government is reviewing a proposal to impose a standard 12.5 percent to 15-18 percent sales tax on locally manufactured or assembled cars with engine capacities up to 850cc. This move, expected in the upcoming 2025–26 federal budget, aims to standardize taxation across the automotive sector but raises concerns about the affordability of small vehicles for the average consumer.
Background
Historically, vehicles in this category benefited from tax exemptions and reduced rates to promote affordability. For example, in the 2021–22 budget, the government abolished duties and taxes on cars up to 850cc to make them accessible to low-income families. This exemption has helped keep prices lower and boosted sales of small-engine cars.
Proposed Changes
The current proposal suggests aligning the sales tax for these vehicles with the standard 18% rate. This change could increase the prices of small cars, making them less affordable for many potential buyers. Industry experts warn that this could lead to a decline in sales, negatively impacting the local automotive industry.
Government and FBR’s Position
The Federal Board of Revenue (FBR) has expressed reservations about applying uniform tax rates across all vehicle categories. They argue that imposing the 12.5 percent to 15-18 percent sales tax on these smaller cars might result in reduced tax collection and revenue losses. The FBR is also mindful of commitments under international agreements that influence tax policy decisions.
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Industry and Consumer Concerns
Automotive sector stakeholders and consumer rights groups are closely monitoring these developments. They emphasize the need to balance revenue generation with economic growth and consumer welfare. The potential increase in taxes could discourage buyers, affecting both affordability and the local car manufacturing ecosystem.
Conclusion
While the government aims to simplify and standardize the sales tax structure in the automotive sector, the proposed Small Cars Tax Increase, raising the rate from 12.5 percent to 15-18 percent on locally manufactured cars up to 850cc, could impact affordability and industry growth. The final decision will need to carefully weigh revenue needs against the economic realities of consumers and manufacturers.
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