Pakistan’s Auto Sector Faces Complex Changes After Budget 2025-26

Following the unveiling of the federal budget for 2025-26, Pakistan’s automotive industry is navigating a challenging environment. Finance Minister Muhammad Aurangzeb introduced several tariff adjustments intended to align with global commerce standards and the directives of the International Monetary Fund (IMF).

While the government positions these adjustments as promoting export-oriented expansion and trade liberalization, industry participants are expressing apprehensions regarding the possible detrimental effects on domestic production.

According to the new budget, Additional Customs Duty (ACD) and Regulatory Duty (RD) will be phased out by 2030. The fifth schedule will be abolished, and Customs Duty (CD) will be capped at 15%.

These modifications, according to the government, are an element of a comprehensive National Tariff Programme designed to stimulate exports and facilitate more seamless access to global supply networks.

However, domestic businesses worry that the reforms may undermine Pakistan’s already vulnerable local manufacturing foundation.

A senior official from a local car manufacturing company stated, “The new carbon tax will drive up vehicle costs, while lower RD on imported cars will make them more affordable, making imports more appealing and local manufacturing less competitive.”

Meanwhile, auto sector specialist Mashood Khan cautioned that the reforms prioritize IMF instructions over domestic industrial objectives.

He stated that the downward trend in ACD, RD, and CD is likely to harm local production rather than stimulate exports. He believes that without a robust domestic industry, the import bill will increase and foreign reserves will suffer, urging the finance minister to reconsider the policy before parliamentary approval.

Khan noted that without a clear plan to encourage industrialization, auto parts and associated industries would face considerable obstacles. He questioned how exports would expand without strengthening the local base.

Shafiq Ahmed Shaikh, an automobile consultant and former Pak Suzuki official, offered a more optimistic perspective, welcoming the overhaul. He stated that a gradual reduction in duties would help Pakistan integrate into global markets and secure better FTAs and PTAs.

He highlighted that duties may drop from 20% to 15% over the next five years and emphasized that aligning tariffs with international standards would provide policy stability and encourage export-focused investments.

Shaikh, however, cautioned that eliminating the 12.5% reduced sales tax on vehicles under 850cc would have a negative impact on lower- and middle-income consumers.

The standard 18% sales tax will be applied, raising the prices of small hatchbacks. Pak Suzuki, which dominates this market segment due to its Alto 660cc, will be the most affected.

Aurangzeb defended the decision, claiming that automakers were not passing on the tax advantage to consumers, rendering the concession ineffective.

Osama Naeem, an auto analyst at AKD Securities, stated that RD on vehicles above 3,000cc will be reduced from 90% to 50%, but specifics for lower engine sizes are still pending. He believes that this reduction in RD will harm local assemblers who face competition from cheaper imports.

He also stated that the ACD cut would have a greater impact on imported completely built units (CBUs) than on local manufacturers, as the latter primarily apply it to parts and raw materials.