IMF rejects proposed 1% sales tax on EVs

ISLAMABAD: The International Monetary Fund (IMF) has objected to the government’s proposal of a slashed 1% sales tax on all new energy vehicles (EVs), injecting new uncertainty into the completion of Pakistan’s new auto policy.

Sources have said the Pakistani authorities intended to propose a 50% lower rate of sales tax on hybrid cars from the prevailing 18% and impose 1% sales tax on new energy vehicles.

However, the international lending body has opposed the move and sought more clarification, the Express Tribune reported. The government of Pakistan and the international institutions’ divergence comes as it aims to complete the new Auto Policy 2026-31by the time the current auto policy comes to an end in June.

Sources said unaddressed differences between two government ministries on the proposed tariffs had made it even tougher for both the Ministry of Industry and Production and the Ministry of Commerce to complete the policy within the June 24 deadline.

The Industry Ministry has already put forth various incentives for the electric vehicles including a reduced 1% customs duty on EV parts to be imported for three years, zero percent sales tax on imported components and 1% sales tax on newly assembled EV locally produced with five years tax deferral, according to policy proposals, which also suggest a zero percent capital value tax, withholding tax and federal excise duty on EV sales during policy years.

Finance Ministry officials, sources say, that the IMF had wished that the sales tax of 18% on all cars remain and that subsidies rather than tariffs were used for promotion of incentives on EV sales.

The policy draft of Pakistan also intends to accelerate localization in the auto sector. Two-wheelers and three-wheelers will have a share of up to 85% in locally sourced materials by 2030, which also involves the new energy vehicle category, and increased levies will be applied on costlier fuel-powered vehicles to incentivize and gradually make a switch to EVs in the longer-term.

Given that Pakistan’s auto policy expires this month, if there are any changes in the sales tax rates and duties for importing vehicles, they should be integrated into the Finance Bill 2026-27, which is set to pass next week by Pakistan’s National Assembly.