ISLAMABAD: The revised draft of Auto Policy 2026-31 has been sent to the Prime Minister, Shehbaz Sharif for his nod before presenting to the Federal Cabinet and Ministry of Finance (MoF) to seek approval of International Monetary Fund (IMF).
The draft Auto Policy was under debate since long and consultations have been held with the stakeholders at several forums including the Deputy Prime Minister, Ishaq Dar and Federal Minister for Power, Sardar Awais Ahmad Khan Leghari.
The draft revised on November 11, 2026 indicates that the government has proposed a comprehensive restructuring of Pakistan’s automobile industry through the Automotive Policy 2026–31, envisaging a gradual reduction in customs duties on locally manufactured and imported vehicles, substantial tax concessions for new energy vehicles (NEVs), mandatory export targets, higher domestic value-addition requirements and performance-based incentives for manufacturers.
The five-year policy seeks to transform the automobile sector from a largely domestic-market-oriented industry into an export-driven manufacturing base integrated with regional and global supply chains, while encouraging the transition towards electric and other new energy vehicles.
The policy proposes a phased reduction in customs duties on completely built units (CBUs) and completely knocked-down (CKD) vehicles, with the objective of bringing tariffs for all vehicle categories down to 15 percent by 2030–31. It also proposes differentiated customs-duty treatment for battery electric vehicles (BEVs), range-extended electric vehicles (REEVs) and plug-in hybrid electric vehicles (PHEVs), alongside reduced sales tax rates and concessions on imported components used in local NEV manufacturing.
Under the proposed sales tax structure, battery electric vehicles (BEVs) will attract a 1 percent rate, while REEVs and PHEVs will be subject to 6 percent and 9 percent, respectively, for vehicles valued up to $50,000. The same rates will apply to imported and locally assembled vehicles.
The policy also proposes an Automotive Development Levy (ADL) ranging from 2 to 10 percent on imported and locally manufactured internal combustion engine (ICE) vehicles, while excluding two- and three-wheelers, tractors and vehicles with engine capacity of up to 1,000cc.
For conventional vehicles, the proposed sales tax rate will be 18 percent for vehicles below 2,000cc and 25 percent for vehicles with engine capacity of 2,000cc or above.
The policy, prepared by the Ministry of Industries and Production through the Engineering Development Board (EDB), covers the entire automobile value chain, including motorcycles, mopeds, rickshaws, cars, SUVs, commercial vehicles, buses, trucks, tractors and auto parts.
It seeks to link the incentives available to manufacturers with measurable performance in domestic value addition, exports, investment, technology transfer and development of local suppliers.
The document identifies inadequate localisation, limited exports, high production costs, dependence on imported components and insufficient integration with international supply chains as major structural weaknesses of the automobile industry.
It argues that the existing tariff structure has encouraged manufacturers to rely on imported components rather than developing competitive local suppliers, while the domestic-market orientation has restricted the industry’s ability to achieve economies of scale.
The policy therefore proposes a shift from protection-based incentives towards a performance-oriented regime under which manufacturers will have to meet specified production, localisation and export obligations to retain access to relevant benefits.
New customs-duty regime for conventional vehicles
One of the major components of the policy is a gradual rationalisation of customs duties on conventional vehicles and their imported components.
The government intends to reduce the existing high tariff protection in phases, with the objective of bringing CBU and CKD customs duties to 15 percent across vehicle categories by 2030–31.
The policy’s tariff schedule provides for different rates according to vehicle category and import status, with reductions spread over the five-year period.
The proposed arrangement is intended to balance two competing objectives: protecting domestic manufacturing and encouraging competition, while gradually reducing the cost of imported vehicles and inputs as local industry becomes more competitive.
The policy maintains that Pakistan’s existing tariff structure has to be recalibrated in view of the changing international automobile market and the need to improve the competitiveness of domestic manufacturers.
It notes that several major automobile-producing countries continue to protect their domestic industries through customs duties and other incentives, but have increasingly linked these measures with investment, local content and export performance.
The policy cites India, Thailand, Vietnam, Indonesia, Hungary and South Africa as examples of countries that have used a combination of tariff protection, localisation requirements, investment incentives and export facilitation to develop their automobile industries.
It argues that Pakistan cannot rely solely on high import duties to develop a sustainable automobile manufacturing base. Instead, tariff protection must be accompanied by investment in technology, supplier development, product quality and export competitiveness.
The proposed reduction in duties is also expected to encourage manufacturers to improve production efficiency and offer more competitive prices to consumers.
Special customs-duty concessions for electric vehicles
The policy provides a separate customs-duty regime for NEVs, with particular emphasis on promoting battery electric cars and SUVs, including smaller and more affordable vehicles.
Under the proposed schedule, imported BEVs in CBU condition with a value of up to $15,000 will be eligible for a customs duty of 5 percent during FY2026–27 and FY2027–28, subject to specified conditions.
The concession is designed to encourage the introduction of affordable electric cars while requiring importers to establish local assembly or manufacturing facilities.
Importers seeking the 5 percent customs-duty concession will have to provide a surety bond and an irrevocable and unconditional bank guarantee from a scheduled bank.
The bank guarantee will cover the difference between the concessional 5 percent duty and the otherwise applicable customs-duty rate. The importer will also have to commit to installing an assembly or manufacturing plant for the imported BEV variant and commencing commercial production by September 30, 2028.
For FY2026–27, the bank guarantee will cover the 20-percentage-point difference between the 5 percent concessional rate and the applicable 25 percent customs duty. For FY2027–28, it will cover the 17-percentage-point difference between 5 percent and 22 percent.
If the importer fails to commence commercial production by the stipulated deadline, the relevant Customs Collectorate will initiate encashment of the bank guarantee.
The policy states that the guarantee will be released after the importer starts commercial production within the prescribed period and provides an authenticated manufacturing certificate issued by the EDB.
In the absence of fulfilment of these conditions, the normal customs-duty rate will apply. The policy specifies that BEVs in the relevant category will otherwise attract customs duty of 25 percent in FY2026–27 and 22 percent in FY2027–28.
For BEVs valued above $15,000, the proposed customs-duty rate will be 25 percent in FY2026–27, declining to 22 percent in FY2027–28, 20 percent in FY2028–29, 18 percent in FY2029–30 and 15 percent in FY2030–31.
PHEVs and REEVs in the relevant CBU categories will also be subject to a phased reduction, with the proposed rate declining from 25 percent in FY2026–27 to 15 percent by the last year of the policy.
Electric two-wheelers and three-wheelers, including electric rickshaws and loaders, will initially face a 30 percent customs duty in FY2026–27. This will decline to 27 percent in FY2027–28, 25 percent in FY2028–29, 20 percent in FY2029–30 and 15 percent in FY2030–31.
Electric tractors will attract a customs duty of 1 percent during FY2026–27 and FY2027–28, rising to 10 percent in the remaining three years.
The policy also provides special treatment for electric commercial vehicles, including prime movers, trucks, dumpers and passenger vehicles designed to carry 10 or more passengers.
Sales tax rates for NEVs and conventional vehicles
The proposed sales tax regime is another major feature of the policy, intended to reduce the upfront cost of electric vehicles and encourage their adoption.
The policy proposes a 1 percent sales tax on locally assembled and imported BEVs valued up to $50,000. The concession will cover four-wheelers, electric light commercial vehicles up to five tonnes, electric three-wheelers, electric two-wheelers and other specified NEV categories.
REEVs valued up to $50,000 will attract a 6 percent sales tax, while PHEVs in the same value category will be subject to 9 percent.
The same rates will apply to imported CBUs and locally assembled vehicles, removing any difference in sales tax treatment between the two categories.
The policy further provides that NEVs valued above $50,000 will be subject to the standard sales tax regime under the Sales Tax Act, 1990.
For imported NEV CBUs, the value for sales tax purposes will include customs duty, while the factory-gate value will be used for locally assembled or manufactured vehicles.
The document also proposes that all inputs used in the assembly and manufacturing of NEVs, including imported or locally sourced parts, raw materials, components, sub-components, sub-assemblies and CKD kits, will be exempt from sales tax under the Sixth Schedule of the Sales Tax Act, 1990.
This exemption is intended to reduce the cost of local manufacturing and encourage the development of domestic suppliers for electric vehicles.
For conventional ICE vehicles, the policy proposes a uniform sales tax rate of 18 percent on imported and locally manufactured vehicles with engine capacity below 2,000cc, while vehicles with engine capacity of 2,000cc or above will attract 25 percent.
The proposed structure is designed to maintain a tax advantage for electric vehicles and make their prices more competitive with conventional petrol- and diesel-powered vehicles.
Automotive Development Levy on ICE vehicles
The policy proposes introduction of an Automotive Development Levy ranging from 2 to 10 percent on imported and locally manufactured ICE vehicles.
The levy will be imposed through a clear classification of vehicles, with a minimum rate for public-service vehicles and vehicles with engine capacity of up to 2,000cc.
However, the ADL will not apply to imported or locally manufactured two- and three-wheelers, tractors and vehicles with engine capacity of up to 1,000cc.
The levy will remain in force during the policy period and will have a sunset clause.
According to the policy, proceeds from the ADL will be utilised to finance export-related incentives, including Drawback of Local Taxes and Levies (DLTL), research and development support for the automobile sector, the vendor development programme, third-party audits and establishment of the Pakistan Automotive Testing Institute.
The proposed levy is intended to create a dedicated financing mechanism for improving the competitiveness of the domestic automobile industry and supporting its transition towards export-oriented manufacturing.
The policy also proposes that the ADL and DLTL schemes should be legislated and implemented through legally enforceable instruments.
Reduced customs duties on auto parts
The government has also proposed a significant reduction in customs duties on imported parts and components to support local automobile manufacturing and improve the competitiveness of domestic suppliers.
Under the proposed tariff schedule, customs duty on NEV-specific sub-assemblies, components and sub-components will be reduced to 1 percent.
For conventional ICE parts, the proposed customs-duty rate will be 5 percent on sub-assemblies and 2.5 percent on components and sub-components.
Customs duty on raw materials used in the manufacturing of ICE parts will be reduced to zero percent, while the rate for raw materials used in NEV-specific parts will also be zero percent.
The policy provides that where the existing customs-duty rate is already below the proposed rate, the lower rate will remain unchanged.
The objective is to reduce the cost of manufacturing inputs, encourage local assembly and create a more competitive environment for domestic parts manufacturers.
The government believes that a rationalised tariff structure for parts will help manufacturers move away from dependence on imported finished components and develop a stronger domestic supplier base.
However, the policy also links tariff benefits with domestic value-addition requirements and performance obligations, so that reduced duties do not become an incentive for continued reliance on imported components without corresponding investment in local manufacturing.
Mandatory domestic value-addition requirements
A major structural reform proposed under the policy is the introduction of minimum domestic value-addition requirements for automobile manufacturers.
The policy identifies low local value addition as one of the principal weaknesses of the automobile industry, particularly in cars, SUVs, commercial vehicles and new energy vehicles.
According to the document, motorcycles and tractors have achieved domestic value addition of up to 90 percent, while cars manufactured by established Japanese companies have reached approximately 65 percent.
However, local value addition in cars manufactured by several companies that entered the market under the 2013 market-openness policy remains around 10 to 15 percent.
The policy attributes this gap to relatively favourable tariff treatment for imported components, limited production volumes, inadequate domestic supplier capacity and insufficient commercial incentives for manufacturers to source inputs locally.
Under the proposed Minimum Domestic Value Addition Requirement (MDVAR), manufacturers will be required to progressively increase local content according to vehicle category and manufacturing status.
For new original equipment manufacturers (OEMs), the requirements will increase in phases during the policy period, with different targets for ICE and NEV categories.
For example, the proposed MDVAR for new manufacturers of cars with engine capacity of up to 850cc will rise from 20 percent in FY2026–27 to 30 percent in FY2027–28, 35 percent in FY2028–29, 40 percent in FY2029–30 and 45 percent in FY2030–31.
For cars and SUVs, the corresponding target will increase from 20 percent in FY2026–27 to 25 percent in FY2027–28, 30 percent in FY2028–29, 35 percent in FY2029–30 and 40 percent in FY2030–31.
For NEV cars and SUVs, the targets will also be increased gradually, with the policy providing a separate transition path to account for the different technological and supply-chain requirements of electric vehicles.
The framework will cover domestic inputs, components, sub-components, labour and eligible factory overheads, with manufacturers required to submit annual domestic value-addition statements supported by relevant records.
The EDB will be authorised to verify declarations, seek additional information, conduct risk-based audits and obtain independent technical or financial verification where required.
The policy also provides for consequences in cases where manufacturers fail to meet their prescribed domestic value-addition targets.
It proposes a mechanism under which additional customs-duty consequences may be applied in the event of non-compliance, subject to the applicable legally authorised tariff instrument and prescribed procedures.
The policy makes clear that the MDVAR scheme itself will not independently authorise the imposition or variation of customs duties. The applicable duty rate, tariff lines, effective date and implementation procedure will have to be specified through the legally authorised instrument.
It also provides that no duty enhancement will be imposed retrospectively for a period before the relevant requirement and legal measure take effect.
Export obligations and ambitious targets
The policy seeks to change the orientation of the automobile industry from domestic-market sales towards exports by introducing mandatory export requirements and performance-linked support.
It argues that Pakistan’s automobile manufacturers have historically operated primarily for the domestic market and have faced cost, compliance, market-access and supply-chain constraints that have limited their ability to compete internationally.
Under the proposed regime, manufacturers will be required to progressively develop export capacity, while additional support will be linked to actual export performance and incremental exports.
The policy sets out export targets for vehicle manufacturers and auto parts producers for the period 2026–31.
Manufacturers of cars, jeeps, double cabins and SUVs will be required to export an amount equivalent to 0 percent of the factory-gate value of annual production in FY2026–27, increasing to 5 percent in FY2027–28, 10 percent in FY2028–29 and 15 percent in each of the final two years.
The policy estimates exports by this category at $201 million in FY2027–28, $433.7 million in FY2028–29, $698 million in FY2029–30 and $745 million in FY2030–31, taking the cumulative amount to approximately $2.078 billion.
For tractor manufacturers, the export requirement will start at 5 percent in FY2026–27, rise to 10 percent in FY2027–28 and 15 percent in FY2028–29 and FY2029–30, before reaching 20 percent in FY2030–31.
The estimated export value for tractors is projected to increase from $16.6 million in FY2026–27 to $74.9 million in FY2030–31, with cumulative exports of approximately $233.4 million.
Manufacturers of motorcycles, rickshaws and related vehicles will face an export requirement of zero percent in FY2026–27, increasing to 5 percent in FY2027–28, 10 percent in FY2028–29, 15 percent in FY2029–30 and 20 percent in FY2030–31.
The policy estimates exports under this category at $36.5 million in FY2027–28, $77.4 million in FY2028–29, $122.8 million in FY2029–30 and $172.7 million in FY2030–31.
The combined export target for cars, tractors and two- and three-wheelers is estimated at approximately $2.72 billion over the policy period.
The policy also sets ambitious targets for auto parts manufacturers, with exports expected to increase from $240 million in FY2026–27 to $1.2 billion in FY2030–31.
The cumulative auto parts export target is $3.29 billion.
Combining vehicle and auto parts exports, the policy envisages total automobile-sector exports of approximately $6.01 billion during 2026–31.
The government intends to support this transition through market discovery, international exhibitions, export facilitation, access to foreign markets and assistance in meeting international technical and quality standards.
Export Facilitation Council and market access
The policy proposes establishment of an Export Facilitation Council under the Ministry of Industries and Production to promote and facilitate exports of automobiles and auto parts from Pakistan.
The Council will be headed by the Minister for Industries and Production or a person nominated by him, with representation from relevant ministries and government departments.
Senior officers not below BPS-21 from the Ministries of Commerce, Foreign Affairs and Finance, the Federal Board of Revenue, State Bank of Pakistan, Trade Development Authority of Pakistan and EDB will participate in the Council.
The Council will oversee export targets, identify potential markets, facilitate participation of manufacturers in international exhibitions, coordinate with relevant government entities and address operational problems faced by exporters.
It will also make recommendations to the Federal Cabinet for enhancing automobile and auto parts exports.
The Council is proposed to meet at least once every two months and submit six-monthly reports to the Prime Minister.
The Ministry of Commerce will lead efforts to secure preferential access to potential export destinations, particularly right-hand-drive markets in Africa, Central Asia and South America.
The EDB will work with TDAP to facilitate participation of automobile and auto parts manufacturers in international exhibitions and trade fairs.
The policy also proposes support for small and medium-sized auto parts manufacturers to meet compliance requirements in export markets.
Under the proposed framework, EDB will work with the Small and Medium Enterprises Development Authority (SMEDA) to develop support mechanisms for manufacturers seeking technical upgrades, quality certification and compliance with international standards.
Vendor development and investment in local manufacturing
The policy places considerable emphasis on developing local vendors and strengthening the domestic supply chain.
It proposes attracting five anchor firms in auto parts manufacturing by the fourth quarter of 2030.
These anchor firms will serve as the nucleus for developing supplier clusters and encouraging technology transfer, quality assurance and production of components that are currently imported.
Automobile manufacturers will be required to participate in vendor-development programmes and provide support to their suppliers for improving production quality and adopting modern manufacturing technologies.
The Ministry of Industries and Production and EDB will prepare a detailed framework for supporting auto parts manufacturers through the Vendor Upgradation and Technology Transfer Programme (VUTTP).
The framework will link assistance with measurable performance targets and provide penalties in cases of deliberate non-performance.
The policy also proposes a new contract-manufacturing regime to utilise existing idle industrial capacity.
The government believes that contract manufacturing could allow new entrants and existing automobile companies to use available production facilities instead of making large initial investments in new plants.
The proposed framework is intended to encourage investment, increase production volumes, reduce manufacturing costs and improve the utilisation of existing industrial capacity.
NEV financing and consumer affordability
Recognising that the higher upfront cost of electric vehicles remains a major obstacle to their adoption, the policy proposes that the State Bank of Pakistan should favourably consider enhancing the maximum credit limit and financing tenure for NEVs.
Under existing SBP regulations cited in the policy, the maximum automobile financing limit is Rs3 million, while the maximum repayment period is three years.
The policy proposes that the maximum financing limit for NEVs should be increased to Rs10 million and the repayment period extended to five years.
The measure is intended to facilitate access to financing for consumers seeking to purchase electric vehicles, particularly cars and SUVs, whose prices remain higher than those of comparable conventional vehicles.
The policy also proposes that the relevant authorities examine the possibility of improving access to financing for NEV manufacturers and suppliers.
The proposed changes are expected to be considered by SBP in coordination with the Ministry of Industries and Production and EDB, with the National Action Plan identifying December 2026 as the target for enhancing the credit limit.
Charging infrastructure and battery swapping
The policy recognises that the development of a reliable charging network is essential for increasing the adoption of electric vehicles.
It proposes that customs-duty concessions on imported charging stations in CBU condition should continue in the absence of sufficient local manufacturing capacity.
The arrangement will be reviewed during the second year of the policy, and adjustments may be made to promote local manufacturing of charging equipment.
The policy also proposes a battery-as-a-service regime under which batteries could be provided on rental basis or exchanged through battery-swapping facilities.
The Ministry of Industries and Production, EDB and NEECA will work with potential charging service providers and automobile manufacturers to develop the framework.
The policy notes that a good battery can constitute around 40 percent of the total price of an electric vehicle. Providing batteries on rental basis could therefore reduce the upfront cost of vehicles and make them more affordable.
Battery swapping is also expected to extend vehicle range and improve convenience, particularly for electric motorcycles, rickshaws and small cars.
EDB will consider regulatory measures to ensure that future NEV designs allow swappable batteries and that batteries used in different vehicles, particularly two- and three-wheelers, are compatible across manufacturers.
The policy also envisages development of technical skills for charging-station installation and maintenance, battery-pack assembly and safety, electric powertrain manufacturing and other specialised areas.
It sets a target of training 2,000 certified EV charging infrastructure installers by 2031, alongside 3,000 technicians in NEV powertrain assembly and 5,000 technicians in EV powertrain and battery-pack assembly.
Sector’s economic contribution and projected foreign exchange savings
The policy describes the automobile industry as an important component of Pakistan’s large-scale manufacturing sector, accounting for approximately 4.5 percent of the sector.
According to the document, domestic automobile production in 2026 is valued at around $6 billion, with production volumes showing a significant increase over the preceding year.
The industry provides approximately 20,000 direct jobs and around 2.5 million indirect employment opportunities, while contributing approximately Rs784 billion in annual taxes.
The sector has attracted around $4 billion in investment and has developed manufacturing capacity across motorcycles, rickshaws, cars, buses, trucks, tractors and electric vehicles.
The policy estimates that domestic manufacturing has generated substantial foreign exchange savings by replacing imports of completely built vehicles.
It projects cumulative foreign exchange savings of approximately $17.70 billion during FY2026–27 to FY2030–31, based on anticipated growth in demand and higher domestic value addition.
It also notes that the production of NEVs has increased substantially, with production of electric cars and SUVs rising from a very low base in 2024 to around 12,800 units in 2026.
The policy considers this transition an opportunity to attract further investment in battery manufacturing, electric powertrains, charging equipment and associated technologies.
Pakistan Automotive Testing Institute and regulatory reforms
The policy proposes establishment of the Pakistan Automotive Testing Institute to improve product testing, safety standards, quality assurance and compliance with international requirements.
The institute is expected to support manufacturers in meeting technical standards required for exports and to strengthen the country’s capacity for testing and certification.
The policy also envisages adoption of additional regulations under the United Nations Economic Commission for Europe WP-29 framework, which provides internationally harmonised vehicle safety and technical standards.
It proposes improved automobile manufacturing certification, digitisation of EDB procedures and gradual phasing out of statutory regulatory orders (SROs).
The government intends to digitise EDB procedures through coordination with the Pakistan Single Window (PSW), while strengthening audits and verification of manufacturers’ claims relating to domestic value addition and exports.
The policy also seeks to curb illegal imports of auto parts and improve transparency in the administration of incentives.
Implementation timeline
The National Action Plan attached to the policy assigns specific timelines and responsibilities to relevant government entities.
Legislation for the ADL and DLTL schemes, as well as adoption of a legally binding export regime, is targeted for December 2026.
Improvement in automobile manufacturing certification and adoption of the minimum domestic value-addition framework are also scheduled for December 2026.
The Export Facilitation Council is proposed to be established in November 2026, while the enhanced credit limit for NEVs is targeted for December 2026.
A new contract-manufacturing regime is scheduled for January 2027, while digitisation of EDB procedures is targeted for the second quarter of 2027.
The policy also envisages enactment of a Motor Vehicle Development Industry Bill by February 2027 and establishment of the Pakistan Automotive Testing Institute by the fourth quarter of 2028.
The EDB and Ministry of Industries and Production will lead implementation, with support from the Ministries of Commerce, Finance, Law and Justice, Foreign Affairs and other relevant departments.
Challenges to implementation
While the policy envisages a major transformation of the automobile industry, its success will depend on the government’s ability to implement the proposed tariff regime, enforce localisation and export obligations and ensure a stable business environment.
The policy itself acknowledges that manufacturers in Pakistan face significant cost disadvantages arising from energy prices, taxation, financing costs, logistics and limited economies of scale.
It notes that business electricity prices in Pakistan were approximately $0.12 per kWh in December 2025, compared with around $0.08 per kWh in Vietnam.
The policy also highlights the relatively high cost of capital and corporate taxation in Pakistan compared with competing manufacturing destinations.
These factors could make it difficult for local manufacturers to compete in international markets, even if customs duties on imported inputs are reduced.
The proposed export targets will also require manufacturers to secure international certifications, establish overseas distribution networks, identify foreign customers and develop products capable of competing on price and quality.
Similarly, the domestic value-addition requirements will require substantial investment in local suppliers, technology transfer, skilled labour and research and development.
The government will also have to ensure that tariff concessions for imported NEVs translate into local manufacturing and do not merely encourage continued imports of finished vehicles.
The policy attempts to address this concern by linking the 5 percent customs-duty concession on selected imported BEVs with a commitment to establish local manufacturing facilities by September 30, 2028, backed by bank guarantees.
However, effective enforcement and timely implementation of the proposed legal and regulatory measures will be critical.
The policy’s broader objective is to move Pakistan’s automobile industry away from a model based primarily on import substitution and domestic-market protection towards a competitive manufacturing and export base.
If implemented effectively, the proposed tariff rationalisation, tax concessions, localisation requirements, export-linked incentives and NEV financing measures could reshape the sector over the next five years.
