ISLAMABAD: Pakistan is preparing a major overhaul of its auto industry, with a draft policy proposing stronger incentives for electric vehicles, tougher localization and export requirements, and gradual reductions in import tariffs.
The draft Auto Policy 2026–31 has been finalized after review by government committees but still requires consultation with the International Monetary Fund in October and approval from the Cabinet.
One of the key proposals is to classify battery electric vehicles (BEVs), range-extended electric vehicles (REEVs) and plug-in hybrid electric vehicles (PHEVs) under the same new-energy vehicle (NEV) category.
The move would give PHEVs access to the incentives available to other NEVs. Under the draft, PHEVs would be subject to a 1% sales tax on completely knocked-down (CKD) units and NEV-specific parts, inputs and raw materials.
The policy also proposes exempting NEVs from Federal Excise Duty (FED), Capital Value Tax (CVT) and withholding tax (WHT).
To encourage EV purchases, the government plans to increase the green financing limit from 3 million rupees to 10 million rupees and extend the maximum loan period from three years to five years.
JS Research said the measures could benefit companies with EV and PHEV models, identifying SAZEW, NCPL, NPL and HUBC as potential beneficiaries.
The proposed policy would remove preferential tax treatment for hybrid electric vehicles (HEVs), bringing them under the tax structure for conventional internal combustion engine vehicles.
Sales tax on HEVs would increase from 8.5% to 25%, while the proposed rate for PHEVs would fall to 1%.
JS Research said the significant price difference could encourage consumers to choose PHEVs over HEVs, particularly when both versions are offered by the same manufacturer.
The change could put pressure on hybrid-focused manufacturers such as HCAR and INDU. However, SAZEW, NCPL and NPL, which offer both HEV and PHEV models, could see consumers shift between the two variants rather than a major change in overall sales volumes, according to the research house.
The draft policy would make vehicle exports a mandatory requirement for manufacturers.
For four-wheelers, export targets would begin at 4% of total production value in fiscal year 2028 and increase to 12% by 2031.
The government expects vehicle and auto-parts exports to generate about $4.4 billion during the policy period.
The proposed Drawback of Local Taxes and Levies (DLTL) scheme would provide exporters with a rebate equal to 10% of net free-on-board export value. An additional 5% incentive would be available to companies that increase exports by at least 5% from the previous year.
The government plans to finance the scheme through additional FED collected from conventional vehicles and has proposed allocating 192.5 billion rupees for DLTL payments.
The draft also proposes a gradual reduction in customs duties on completely built-up (CBU) vehicles, with duties potentially falling by up to 80% by fiscal year 2031.
Regulatory duty and additional customs duty would be eliminated after 2031. Duties on localized and non-localized auto parts would also be reduced to 15% and 10%, respectively.
The National Tariff Policy would delay the annual tariff reductions by one year under the proposal.
JS Research said reducing CBU tariffs to a maximum of 15% could become a major point of debate before the policy is finalized.
The draft sets domestic value addition targets for different segments by fiscal year 2031.
The targets include 40% for passenger cars, 45% for light commercial vehicles, 80% for tractors, 90% for motorcycles and rickshaws, and 15% for NEVs.
The policy would also restrict commercial imports of used vehicles up to five years old to active corporate tax filers with 3S networks covering sales, service and spare parts.
A 40% regulatory duty would initially apply to such imports and would be phased out by 2030.
JS Research said the stricter localization requirements could favor established manufacturers with existing domestic production facilities, while newer entrants, particularly Chinese automakers, may need to make significant investments to meet the targets.
The research house said the proposed EV incentives and higher green financing limit would be positive for SAZEW, NCPL, NPL and HUBC, while higher taxes on HEVs could negatively affect HCAR and INDU.
It also said tighter restrictions on used-vehicle imports could benefit the broader auto sector by reducing competition from imported used cars.
However, the impact of mandatory export targets remains uncertain because the industry has fallen short of export targets in the past, according to JS Research.
The final shape of the Auto Policy 2026–31 will depend on the outcome of IMF consultations and Cabinet approval.
