Auto policy offers electric cars a 1 percent sales tax, and leaves the bill to petrol car buyers
The auto policy announced on 7 November cuts sales tax on battery electric cars to 1 percent, against the 18 percent the IMF had recommended, and lifts the EV loan ceiling fivefold. The levy meant to pay for it has no published rate.
A buyer of an Rs8 million electric car would pay Rs80,000 in sales tax under the auto policy announced in Islamabad on 7 November. At the 18 percent rate the IMF had recommended, the bill would be Rs1.44 million. The Rs1.36 million difference has to be found somewhere, and the policy does not yet say where.
Haroon Akhtar Khan, the prime minister's adviser on industries and production, announced the policy at a news conference with Information Minister Attaullah Tarar. Its headline goal is to raise vehicle exports from about $200 million in the last fiscal year to $6 billion over five years, an average of $1.2 billion a year. Akhtar said prices of all vehicles except luxury ones would come down gradually.
What changes for electric cars
Sales tax would be 1 percent on fully electric cars, 6 percent on range extended electric cars and 9 percent on plug in hybrids. The ceiling on EV loans rises from Rs2 million to Rs10 million, and the repayment period stretches from three years to five. Sales tax on charging equipment falls to 1 percent.
The concession is narrower than the headline. It applies only to vehicles priced below $50,000, which would also be exempt from federal excise duty, withholding tax and capital value tax. Dearer cars stay under the normal regime. Akhtar said the arrangement is "subject to the approval of the IMF", and the policy still needs federal cabinet approval. The ministry had not published the policy text as of 8 November.
Two sums behind the loan ceiling
A loan of Rs10 million over 60 months means Rs166,667 a month in principal alone, before any interest. The old limit of Rs2 million over 36 months was Rs55,556 a month. The new ceiling therefore allows a monthly commitment three times as large as the old one. A bank has to underwrite that against the borrower's income, so the ceiling is a limit and not an entitlement. A household that can safely carry Rs55,556 a month does not become able to carry Rs166,667 because the rules allow it.
The export targets need the same treatment. The draft policy reported on 21 October set combined vehicle and parts export targets of $256.6 million for 2026 to 2027 and $2.19 billion for 2030 to 2031. A straight line between those two points adds up to about $6.1 billion over five years. To get from the first to the last, exports would have to grow by roughly 71 percent a year for four years running, because 2,190 divided by 256.6 is about 8.5, and the fourth root of 8.5 is about 1.71. Few export sectors sustain that pace for long, and the plan depends on it.
Manufacturers that meet their targets earn a rebate of 5 percent of export value, through the drawback of local taxes and levies scheme. On $6 billion of exports, that is $300 million. They also get an extra 10 percent incentive tied to export growth, whose cap is not published. Under the draft, a company that misses its target two years in a row can lose its manufacturing certificate.
Who pays for the gap
Cutting 17 percentage points of tax does not make revenue disappear. The policy creates an automotive development levy on conventional petrol and diesel vehicles, with engines of 1,000cc or less exempt, to fund EV incentives, export rebates, research and local parts makers. The rate has not been stated, and that single number decides whether the scheme pays for itself. A high levy moves the cost onto buyers of larger petrol cars. A low one leaves the budget exposed.
The winners are those who can already afford an EV and can finance one. A Rs1.36 million tax gap on an Rs8 million car helps a buyer who has Rs8 million. The lower tax on charging equipment goes at a second brake on adoption, the shortage of places to charge. Cheaper equipment does not by itself create a charging business, though. An operator needs steady demand, and the policy offers financial support to bridge the gap between station costs and early returns without naming an amount.
Local assemblers face a different risk. A 1 percent rate on imported electric cars below the price line, with import duties falling over five years, can make a built up import cheaper than a locally assembled car before localisation targets take effect. The policy makes localisation mandatory and adds 45 vehicle safety and quality standards, but no localisation percentages have been published. Those percentages, and the levy rate, are what an assembler needs before committing to a new line.
The next step is the federal cabinet's decision. The first export target year closes on 30 June 2027, and a published levy rate would show by then whether the 1 percent rate can be paid for.
