IMF objects to Pakistan’s proposed 1% sales tax on electric vehicles

The International Monetary Fund (IMF) has objected to Pakistan’s proposal to keep sales tax on electric vehicles and their parts at 1%, arguing that the concession is discriminatory and should be withdrawn, according to people familiar with the talks.

The objection was raised during negotiations between Pakistan and the IMF linked to the fourth review under the country’s ongoing economic program, the sources said. The IMF’s program schedule places the fourth review in September 2026.

Pakistan currently proposes a 1% sales tax on electric vehicles and their parts, compared with the standard 18% rate, while the draft Auto and Auto Parts Manufacturing Policy 2026-31 contains several additional tax incentives for electric vehicles. Pakistan’s Sales Tax Act sets the general sales-tax rate at 18%.

The IMF has questioned the preferential treatment, saying electric vehicles are a luxury item and should not receive such a significant sales-tax concession, the sources said.

The disagreement could result in changes to the draft auto policy before it is finalized.

Negotiations on the auto policy have not yet been completed, and the IMF has raised objections to several provisions of the draft, the sources said.

The Ministry of Industries and Production has presented the draft Auto and Auto Parts Manufacturing Policy 2026-31 to the IMF. The objections will be presented to the Economic Coordination Committee and the federal cabinet, after which changes could be made following consultations with stakeholders.

The revised draft is expected to be finalized in consultation with the local automobile industry, importers and the IMF, the sources said. Government statements in September also confirmed that consultations on the draft were continuing before finalization.

How much could the sales tax change cost EV buyers?

If the sales-tax rate on electric vehicles is increased to 18%, a vehicle with a taxable value of PKR 10 million would face sales tax of about PKR 1.8 million instead of PKR 100,000 under the proposed 1% rate, according to the sources.

The final tax treatment will depend on the outcome of discussions between Pakistan and the IMF and subsequent approval of the policy.

The draft policy seeks to promote electric, plug-in hybrid and range-extended electric vehicles by giving them equal status and providing a special incentive package.

It proposes a 1% sales tax on electric vehicles and their parts and exemptions from federal excise duty, capital value tax and withholding tax. It also proposes a 1% customs duty on equipment used for electric-vehicle charging stations.

The draft recommends increasing the financing limit for electric vehicles to PKR 10 million and extending the loan repayment period to between three and five years.

The policy makes the promotion of electric vehicles a mandatory objective, with greater emphasis on environmentally friendly and fuel-efficient vehicles.

However, these incentives could be revised following the IMF’s objections, the sources said.

What else would change under the new auto policy?

The proposed policy aims to reduce vehicle prices and improve manufacturing standards while increasing Pakistan’s integration into global automotive supply chains.

The draft calls for lower prices and improved quality for all vehicles other than luxury models, while reducing the industry’s reliance on taxation.

It also proposes reducing customs duties on conventional vehicles by as much as 80% over five years under the new National Tariff Policy, with duties to be reduced annually from 2026.

The policy seeks to create greater competition in vehicle manufacturing to encourage innovation, technology adoption and the introduction of new features.

Manufacturers would also face specific performance and export targets, with penalties proposed for companies that fail to meet their commitments.

Under the draft, car manufacturers would be required to export 4% of production in FY27, rising to 20% by FY31.

The export target for auto-parts manufacturers would increase from 5% to 15%, according to the draft.

The policy proposes establishing an Auto Parts Export Council and introducing a duty drawback of local taxes and levies scheme to support exports.

How would manufacturing standards change?

The government plans to align Pakistan’s automotive manufacturing standards more closely with international benchmarks.

The draft proposes adopting 62 global standards initially and introducing another 45 standards by 2029.

It also calls for the establishment of a Pakistan Auto Testing Institute to improve vehicle testing and compliance.

The policy would require automakers to provide customers with a delivery date at the time of booking. Any increase in a vehicle’s price after booking would have to be absorbed by the company, according to the draft.

The government has briefed the IMF that the policy is intended to lower vehicle prices, improve manufacturing quality and make Pakistan’s automotive industry more competitive in international markets.

The final version of the policy is expected to reflect the outcome of consultations between the government, IMF and industry stakeholders.