Pakistan plans higher withholding taxes on luxury vehicles

Pakistan government plans to impose higher withholding taxes on luxury vehicles in the 2025-26 budget, targeting cars above 1,300cc to generate more revenue from the auto market, according to officials familiar with the matter.

The Federal Board of Revenue (FBR) has finalized its proposals and submitted them to the International Monetary Fund (IMF), sources told Nukta.

Currently, the withholding tax on vehicles is 2% of the total value for those with engine capacities between 1,300cc and 1,600cc; 3% for 1,601cc to 1,800cc; 5% for 1,801cc to 2,000cc; 7% for 2,001cc to 2,500cc; 9% for 2,501cc to 3,000cc; and 12% for vehicles above 3,000cc.

The move builds on last year’s shift to a value-based taxation model that replaced fixed advance taxes with levies linked to vehicle prices across all categories.

The latest measure aims to raise billions more in the upcoming fiscal year, as tax coverage expands to include smaller engine variants now reclassified as premium.

The FBR collected more than PKR 4 billion in withholding taxes from all vehicle segments in 2024, with officials projecting significant revenue growth after the new brackets take effect.

While tightening restrictions on luxury gasoline vehicles, Islamabad is taking a softer approach toward cleaner technologies.

Authorities have decided to maintain reduced sales tax rates for locally assembled hybrid electric vehicles (HEVs) through June 2026.

The current structure—8.5% for hybrids up to 1,800cc and 12.75% for those between 1,801cc and 2,500cc—will remain unchanged.

This status quo comes amid growing foreign pressure. The Japan Chamber of Commerce and Industry (JCCI), a key stakeholder representing hybrid-heavy Japanese automakers, has written to the prime minister urging Pakistan to prioritize hybrids over an immediate shift to battery electric vehicles (BEVs).

The Prime Minister’s Secretariat has since tasked relevant ministries with reviewing the recommendation and presenting a way forward.