The Pakistan Auto Policy 2026-31 is the most significant auto reform in years, offering major tax relief on electric and hybrid vehicles. But there is a catch: the International Monetary Fund (IMF) gets to weigh in before anything is final, and early signals suggest the Fund is not fully on board with the plan.
What Is the Pakistan Auto Policy 2026-31?
The Pakistan Auto Policy 2026-31 is a five-year framework designed to expand local vehicle manufacturing, encourage electric vehicles and increase technology transfer in the automotive sector. Pakistan’s previous Auto Industry Development and Export Policy expired on June 30, 2026, leaving buyers and car makers without a clear long-term roadmap until now.
Prime Minister Shehbaz Sharif gave in-principle approval to the proposed Auto Policy 2026-31, which includes phased duty cuts on hybrid vehicles, incentives for commercial transport and measures to promote vehicle exports and local manufacturing. The meeting was held on September 9 in Islamabad.
Big EV Tax Breaks at the Heart of the Policy
The draft draws a sharp line between older hybrid technology and next-generation electric vehicles. Under the approved draft, Battery Electric Vehicles (BEVs) will receive the highest level of tax incentives, followed by Range Extended Electric Vehicles (REEVs) and Plug-in Hybrid Electric Vehicles (PHEVs).
The draft proposes a concessional sales tax rate of just 1% on parts used to locally produce all electric vehicles. It also proposes exempting electric vehicles from federal excise duty, capital value tax and advance income tax. That is a dramatic reduction from the standard rates most car buyers deal with today.
For electric-vehicle charging stations, the draft proposes keeping customs duty on raw materials and parts at a concessional rate of 1%, meant to support the development of charging infrastructure alongside the push for greater EV adoption. This matters a lot because cheap EVs are of limited use without a reliable place to charge them.
The policy also reshapes how plug-in hybrids are categorised. The draft expands the clean-vehicle definition from narrow EVs to ‘New Energy Vehicles’ (NEVs), a bucket that now officially includes Battery EVs (BEVs), Plug-in Hybrids (PHEVs), Range-Extender EVs (REEVs) and Fuel Cell Vehicles (FCVs). This broader definition is new and gives more vehicle types access to lower tax rates.
If you are interested in the kind of EV models entering the Pakistani market right now, see our coverage of the Chery Q EV debuting at PAPS 2026 with a 400km range, which shows how new entrants are already lining up to benefit from the expected policy shift.
Hybrid Cars Get Duty Cuts, Not Full Exemptions
Standard hybrid vehicles (those without a plug) are not getting the same generous treatment as full EVs. The policy proposes tax incentives for electric vehicles but ends sales-tax concessions for hybrids, and pushes local production of EV components to cut reliance on imports.
However, import duties on hybrids will still fall over time. The draft proposes a 20% reduction in taxes on hybrid vehicle imports over the next five years. It also proposes reducing duties on hybrid vehicles up to 800cc and those between 851cc and 1,000cc from 50% to 30% over the same period.
The policy also proposes reducing the duty on hybrid trucks from 30% to 15%. The duty on hybrid commercial vehicles is proposed to be reduced from 60% to 30%, while that on hybrid buses is proposed to be lowered from 30% to 15%. This should bring down running costs for logistics businesses and public transport operators over time.
On the conventional car side, the government plans to reduce customs duty on all cars to 15% by FY2030-31. That is a phased opening of the market, giving existing local assemblers time to adjust before cheaper imported cars arrive in large numbers.
The IMF Question Mark
Here is where the policy hits a wall. Pakistan’s new Auto Policy 2026-31 is stuck as the IMF pushes back on lower taxes for electric and hybrid vehicles. The IMF’s concern is straightforward: the disagreement centres on sales tax. Officials proposed just 1% on new energy vehicles (NEVs) and 9% on hybrids. The IMF wants the full 18% GST applied across the board.
Lower rates, in the IMF’s view, create distortions and reduce revenue at a time when Pakistan needs fiscal discipline. Instead of tax cuts, they suggest subsidies paid directly. That is a very different approach and one that the government has not committed to yet.
The draft will now undergo legal vetting by the Ministry of Law, while the Ministry of Finance has been directed to take it up with the IMF for vetting. Following the IMF’s approval, the policy will be presented before the Economic Coordination Committee (ECC), and after cabinet approval it will go to Parliament.
An Environmental Levy on Big Engines
The government is not just cutting taxes. It also plans to raise money from large-engine vehicles. The government is considering imposing an environmental levy on larger vehicles, with revenue allocated to promoting exports and research and development. A 10% environmental levy has been proposed on vehicles with engine capacities between 2,001cc and 3,000cc, while a 19.5% levy has been proposed on vehicles with engine capacities of 3,001cc and above.
What This Means for Car Buyers in Pakistan
If you are planning to buy a car soon, the picture is mixed. The EV tax breaks look attractive on paper, but most electric vehicles available in Pakistan are expensive. Many electric and hybrid vehicles available in Pakistan fall within price ranges of approximately Rs7 million to Rs30 million. Lower-income households cannot realistically afford most vehicles in these categories. As a result, a substantial portion of the immediate benefit from tax concessions could go to consumers who already have considerable purchasing power.
The prime minister directed that the new auto policy should place greater emphasis on technology transfer and expand employment opportunities for skilled Pakistanis. That signals the government wants something more than just cheaper cars for richer buyers. Whether the final, IMF-vetted policy delivers on that will depend on how the October talks go.
Frequently Asked Questions
When does the Pakistan Auto Policy 2026-31 come into effect?
Implementation of the policy will begin after approval from the ECC and the federal cabinet. The government must first clear IMF talks expected in October, then go through legal vetting, the ECC and cabinet before any measures take effect.
Will electric vehicles become cheaper under this policy?
Potentially yes, but it depends on IMF approval. The draft proposes further tax incentives for small electric vehicles to encourage their adoption, including a concessional sales tax rate of 1% on parts used to locally produce all electric vehicles. If the IMF agrees, local EV assembly costs should fall and some savings could reach buyers.
Why does the IMF have a say in Pakistan’s auto policy?
Pakistan is under an IMF programme and has agreed to certain fiscal conditions, including maintaining government revenue. The IMF talks are expected to focus on vehicle duties, tax concessions and proposed incentives for electric and hybrid vehicles, which have remained a sticking point because of their potential impact on government revenue.
What happens to regular hybrid cars under the new policy?
Hybrid electric vehicles and conventional internal combustion engine (ICE) vehicles will be treated equally in terms of duties and taxes. Standard hybrids lose their special sales-tax concession, but import duties on most hybrid categories will still fall gradually over five years, so prices are not expected to spike sharply.
