ISLAMABAD (PEN) : The federal government has announced a new tax on petrol and diesel-powered vehicles as part of the Budget 2025–26. This levy targets all internal combustion engine (ICE) vehicles, including those manufactured locally and imported models.
Tax Structure Based on Engine Capacity
According to the Finance Bill 2025–26, a fixed levy will be imposed at source from manufacturers and importers, based on engine size and calculated as a percentage of the vehicle’s total price. The tax rates are:
1% for vehicles with engines under 1300cc
2% for vehicles between 1300cc and 1800cc
3% for vehicles above 1800cc
In addition to these, a uniform *1% levy* will be applied across all engine categories, leading to a cumulative price increase for buyers.
Impact on Car Prices and Industry Concerns
While the tax affects all ICE vehicles, industry experts warn that mid- to high-end and imported cars will experience the most significant price hikes. This may discourage sales in a market already facing challenges from elevated production costs, import restrictions, and reduced consumer demand.
A senior executive at a leading automaker stated,
“The levy may seem modest on paper, but when applied to vehicles in the 1800cc and above category — particularly those imported — the impact on final prices will be substantial.”
Potential Shift Toward Electric Vehicles
The new levy is seen by some analysts as a government initiative to encourage the adoption of hybrid and electric vehicles (EVs). By imposing additional costs on traditional fuel-powered cars, policymakers may be setting the stage for future incentives favoring greener transportation.
However, experts caution that without significant investments in EV infrastructure — such as charging stations and battery supply chains — the transition to electric mobility may be slow. Auto policy analyst Faheem Ahmed noted,
“If this levy is to be an effective nudge toward electrification, it must be backed by robust infrastructure development and clear incentives for EV buyers.”
Industry Outlook
This announcement arrives amid historic lows in Pakistan’s automobile production, with local manufacturers cutting back output and some international brands halting operations due to economic and regulatory uncertainties.
Consumers and industry stakeholders alike are watching closely to see how the new tax will affect vehicle affordability and market dynamics moving forward.
