ISLAMABAD: Pakistan is planning a major restructuring of its automotive industry under a proposed five-year policy that seeks to reduce import dependence, expand auto parts exports, promote new energy vehicles (NEVs) and gradually shift the sector away from tariff protection towards performance-based incentives. The Ministry of Industries and Production’s Autos and Auto Parts Manufacturing Policy 2026– 2031, draft 4 updated on October 22, 2026, after getting Prime Minister’s nod envisages a sharp reduction in automotive tariffs, mandatory export targets for manufacturers, minimum domestic value-addition requirements and changes to the taxation of electric and conventional vehicles.
The draft sets an ambitious objective of increasing automotive exports, particularly auto parts, to help integrate Pakistani manufacturers into international supply chains. It also proposes reducing Pakistan’s overall weighted tariff to below 6 per cent by 2030, while retaining transitional protection for domestic manufacturers facing high production costs.
The proposals come at a critical juncture for an industry that the draft estimates contributes around 4.5 per cent of large-scale manufacturing, supports approximately 2.5 million direct and indirect jobs, and comprises more than 2,200 auto parts manufacturers. Domestic automotive production is estimated at around $6 billion in 2026, while the sector contributed more than Rs784 billion in federal taxes during FY2025–26, according to the document. Exports emerge as the central policy priority
The proposed policy places auto parts manufacturing and exports at the centre of the government’s industrial strategy, arguing that sustained competitiveness will depend on developing a deeper domestic supplier base rather than relying primarily on the assembly of completely built units (CBUs). Automotive and auto parts exports stood at approximately $190 million in FY2025–26, a level the draft considers substantially below the sector’s potential. To address this gap, the policy proposes a Duty Drawback of Local Taxes and Levies (DLTL) scheme under which eligible exporters would receive baseline compensation equivalent to 5 per cent of eligible net free-on-board export value.
An additional 10 per cent compensation on incremental exports would be available where the prescribed growth threshold is met. The scheme would be conditional on minimum domestic value addition, independent third-party verification and the realisation of export proceeds through the State Bank of Pakistan. The draft estimates that the scheme and associated export measures would require approximately Rs168 billion over the policy period.
It also proposes mandatory export targets for automobile manufacturers and Tier-1 parts suppliers. Under the draft schedule, manufacturers of cars, jeeps, double-cabin vehicles and SUVs would move from a zero export requirement in FY2026–27 to 5 per cent in FY2027–28, rising to 10 per cent in FY2028–29 and 15 per cent in each of the final two years. Failure to achieve the prescribed targets for two consecutive years could lead to cancellation of a manufacturing certificate, except in cases of force majeure.
The draft also proposes financial penalties for manufacturers that fail to meet applicable export obligations. These provisions would make export performance an increasingly important consideration in manufacturers’ investment, sourcing and production decisions. Localisation requirements to tighten A second major pillar of the proposed policy is the gradual increase in minimum domestic value addition requirements, particularly for manufacturers that entered the Pakistani market under the liberalisation measures introduced in 2013 and thereafter. The draft argues that low local value addition in several newer vehicle programmes has increased dependence on imported components, exposed manufacturers to exchange-rate volatility and limited the development of domestic supplier capabilities.
For new original equipment manufacturers (OEMs), the proposed domestic value-addition requirement for cars and SUVs using internal combustion engines would rise from 20 per cent in FY2026–27 to 40 per cent in FY2030–31. For new-energy cars and SUVs, the proposed requirement would increase from 10 per cent to 25 per cent over the same period. The framework also contains separate requirements for smaller cars, light commercial vehicles, trucks, buses, tractors, motorcycles and rickshaws. Existing manufacturers would be subject to separate provisions, including a proposed annual increase of 2 percentage points over the previous year’s domestic value addition, with a cumulative increase of 8 percentage points by the end of the policy period. Access to specified concessionary tariffs would be linked to compliance with the applicable requirements and agreements with the Engineering Development Board (EDB). For auto parts manufacturers, the policy proposes lower customs duties on selected components, sub-components and raw materials, with a particular emphasis on technologies needed for new- energy vehicles.
The intention is to make domestic sourcing more competitive and encourage investment in higher-value manufacturing. Electric vehicles to receive preferential tax treatment The proposed policy seeks to accelerate the adoption of battery electric vehicles (BEVs), rangeextended electric vehicles (REEVs) and qualifying plug-in hybrid electric vehicles (PHEVs) through differentiated sales tax rates and other fiscal measures. Under the draft, the proposed sales tax rates would be 1 per cent for BEVs, 6 per cent for REEVs and 9 per cent for qualifying PHEVs with a minimum pure-electric range of 50 kilometres on a single charge. The draft also proposes that federal excise duty, special excise duty, capital value tax and withholding tax would not be levied on NEVs, except for vehicles valued above $75,000, subject to the proposed framework. These measures are intended to narrow the upfront price difference between electric vehicles and comparable conventional vehicles.
The draft identifies acquisition cost, limited charging infrastructure and battery costs as important barriers to wider NEV adoption. It further proposes continuing zero customs duty on imported charging stations in completely built-up condition, while reviewing the arrangement in the second year of the policy. Another proposed intervention is a battery-as-a-service framework that would support battery swapping and rental arrangements. Since batteries can account for a substantial share of an electric vehicle’s purchase price, the measure is intended to reduce initial acquisition costs and improve affordability. The draft also proposes enhanced credit limits for NEVs and measures to support the development of charging infrastructure. New development levy proposed on conventional vehicles To help finance export incentives, supplier development and automotive research, the draft proposes an Auto Development Levy (ADL) on imported and locally manufactured or assembled internal combustion engine vehicles. The proposed levy varies by vehicle category and engine capacity. Passenger vehicles below 1,000cc would be exempt, while vehicles between 1,001cc and 2,000cc would attract a proposed 2 per cent levy. Vehicles above 2,000cc would face a proposed rate of 10 per cent. A 2 per cent levy is also proposed for trucks and light commercial vehicles, buses and vans, as well as prime movers other than agricultural tractors. Motorcycles, three-wheelers and agricultural tractors would be exempt under the proposed schedule. The draft envisages the levy remaining in force during the five-year policy period.
According to the document’s fiscal projections, ADL collections would amount to approximately Rs232.76 billion over FY2026–27 to FY2030–31. Proposed expenditure on export rebates, vendor development, testing facilities, research and third-party evaluations is estimated at Rs168.34 billion, implying projected net fiscal savings of Rs64.42 billion over the period. The figures are projections contained in the draft and would depend on the final policy design, implementation and actual collections. Contract manufacturing proposed to utilise idle capacity
The draft also seeks to address the underutilisation of existing automotive manufacturing capacity by allowing contract manufacturing arrangements between companies. Under the proposed framework, a manufacturer could use another manufacturer’s facilities, either fully or partially, subject to a transparent regulatory mechanism administered by the EDB. The measure is intended to lower entry barriers for new players, reduce the investment required to establish manufacturing facilities and improve the utilisation of idle industrial capacity.
The policy also proposes formal recognition of L6 and L7 category vehicles, which could provide additional opportunities for low-cost urban mobility solutions, including small electric vehicles. For consumers, the draft places emphasis on improving product quality, strengthening warranty support, enhancing vehicle safety and introducing more effective mechanisms for complaints and corrective action. It also proposes wider adoption of UNECE WP-29 vehicle safety regulations, with 45 additional regulations targeted for adoption by 2029, alongside the establishment of a Pakistan Automotive Testing Institute. Digitalisation and phase-out of SRO-based arrangements The proposed policy seeks to reduce regulatory fragmentation through the digitisation of EDB procedures and the gradual phase-out of automotive-specific statutory regulatory orders (SROs). It envisages integrating relevant approvals and procedures with the Pakistan Single Window (PSW), improving traceability and subjecting import approvals to external audit.
The draft also proposes removing automotive tariffs from the Fifth Schedule of the Customs Act, 1969, as part of a broader move towards a more transparent and rules-based tariff structure. The government’s implementation framework envisages a steering committee headed by the Minister for Industries and Production, with responsibilities distributed among the relevant ministries, the EDB and other agencies. Several proposed measures are scheduled for action by the end of 2026, including the adoption of the domestic value-addition framework and a legally enforceable export regime.
The new contract manufacturing framework is targeted for January 2027, while the phase-out of SROs is envisaged by the fourth quarter of 2030. Implementation will determine the outcome The proposed policy represents a shift in emphasis from protecting domestic assembly through high tariffs towards encouraging export capability, local supplier development, technology transfer and measurable industrial performance.
However, its success will depend on whether domestic manufacturers can meet progressively higher localisation and export requirements while managing Pakistan’s relatively high energy, financing and logistics costs. The policy itself acknowledges that these structural disadvantages can undermine competitiveness if tariffs are reduced faster than manufacturers can improve productivity and supplier capabilities. For investors, the proposed framework could create opportunities in automotive components, electric-vehicle supply chains, charging infrastructure, battery services, testing and homologation, and contract manufacturing.
For consumers, the proposed tax changes and greater competition could improve vehicle affordability and choice, although the actual impact on retail prices would depend on final tax measures, implementation and manufacturers’ pricing decisions.
