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The government is mulling a plan to impose the standard 18% sales tax on locally manufactured and assembled cars with engine capacities up to 850cc. Currently, these vehicles are taxed at a concessional rate of 12.5%, but this relief could be withdrawn in the fiscal year 2025–26.
This proposal is part of a broader revenue enhancement strategy, with authorities reviewing all existing sales tax exemptions in an effort to unify tax rates under the standard 18% regime.
The Federal Board of Revenue (FBR) is evaluating an amendment to the 8th Schedule of the Sales Tax Act, 1990. If approved, entry number 72, which allows the 12.5% rate for small cars, would be removed. This change would align tax rates for all motorcars, regardless of engine capacity, with the standard rate.
The FBR’s goal is to streamline the tax system, reduce anomalies, and enhance revenue collection efficiency.
Possible Policy Shift for Used Car Imports
In addition to local car taxation, officials are discussing changes to the import rules for used vehicles. There is an ongoing debate about permitting the import of cars up to five years old, which would mark a significant shift in the current import policy.
Hike Proposed in Withholding Tax for Larger Vehicles
Parallel to changes for smaller cars, the FBR has also proposed increasing Withholding Tax (WHT) rates on cars with engine capacities exceeding 1,300cc. Presently, WHT rates are tiered by engine size, ranging from 2% to 12%:
- 1,300cc–1,600cc: 2%
- 1,601cc–1,800cc: 3%
- 1,801cc–2,000cc: 5%
- 2,001cc–2,500cc: 7%
- 2,501cc–3,000cc: 9%
- Above 3,000cc: 12%
If the new proposal moves forward, higher rates will apply across all categories.
These tax adjustments follow the government’s transition last year from a fixed tax model to a value-based system, where levies are linked to the vehicle’s market value rather than a flat rate.
According to official data, the FBR collected over Rs. 4 billion in vehicle-related withholding taxes in 2024. With the new changes in place, authorities expect a significant increase in revenue in the upcoming fiscal year.
