Fajar Rehman
The Auto Industry Development and Export Policy, which governed the sector from 2021 to 2026, has now expired, and the industry finds itself in an uncomfortable holding pattern. A handful of players are waiting patiently for a replacement policy to arrive. The sharper operators are not waiting at all. They are already adjusting to whatever the default tax and duty position turns out to be. Confusion over taxes and duties runs through the entire sector, infighting among assemblers continues unabated, and into that vacuum, commercial importers are quietly finding room to expand.
There is at least one piece of good news, and it belongs to electric vehicle enthusiasts. Sales tax and duty concessions for EVs have been extended for another year. Several players who rely entirely on completely built units, CBUs, are likely to keep that strategy running for now. What remains unclear is what happens once this one-year extension runs out, particularly since the IMF continues to push firmly for normalized taxation across this category. Some assemblers may choose to delay their EV production plans altogether, while nearly everyone will keep selling CBUs in the interim, expecting prices in the mid-crossover segment to hold steady.
Range-extended electric vehicles, or REEVs, will continue receiving the same tax treatment as pure EVs, largely because they appear to be gaining real traction in the market. A few EVs, all imported as CBUs, along with one REEV assembled locally through CKD, are already selling briskly. More entrants into this segment should be expected soon. At the same time, certain players are actively lobbying to secure similar tax treatment for plug-in hybrids and REEVs, hoping to extend the same favourable terms further.
Under the current default arrangement, EVs and REEVs attract a general sales tax of just 1 percent, while plug-in hybrids and hybrid electric vehicles face 25 percent in certain segments. The one-year extension applies specifically to the EV and REEV policy, whereas the reduced tax rate previously enjoyed by HEVs and PHEVs has lapsed entirely. That pushes their GST rate up to 25 percent, putting them on equal footing with comparable conventional combustion vehicles. Some industry players are hoping a statutory regulatory order will bring that figure back down to 18 percent, though nothing has been confirmed yet.
A second pressure point affecting assemblers across the board is the emergence of reverse cascading within the middle of the market. Duty on commercial imports of parts has been reduced to 25 percent, while CBU imports carry duties ranging from 30 to 50 percent. Locally assembled CKD units, by contrast, face duties of 32 to 46 percent depending on localization levels, with newer entrants facing a weighted average somewhere between 38 and 40 percent. Local assemblers are hoping for yet another regulatory order that would bring CKD duties down further.
Put simply, several players are betting on two specific changes materializing: reduced GST for HEVs and PHEVs, and lower tariffs on CKD imports. That expectation has already led some to pause production in the affected segments, particularly hybrids and plug-in hybrids. One Japanese manufacturer broke ranks and revised its hybrid pricing anyway, resuming order bookings, while most competitors continue to wait on the sidelines for policy clarity.
That is the situation on the ground right now. The government, meanwhile, is still consulting economists about the shape the final policy should take, which naturally raises the question of why this consultation did not happen much earlier. One Lahore-based economist has expressed considerable frustration with what he considers weak analytical work coming out of various ministries over the past year.
The groundwork for this auto policy should have been completed well ahead of time, ideally presented alongside the federal budget or even before it. Instead, the new fiscal year is already underway, the policy remains stuck in deliberation, and lobbying efforts from industry players show no signs of slowing down.
In the meantime, speculation has taken over. Fresh price forecasts keep circulating based on anticipated tax changes that have not yet been finalized. It looks increasingly likely that July will pass under this same cloud of uncertainty, with industry production averaging only around 25,000 units a month. Some plants have shut down entirely, others are running at partial capacity, and the sooner policy clarity arrives, the better it will be for everyone involved.
Looking further ahead, the broader direction appears to favour reduced protection for domestic manufacturing. CBU tariffs are already trending lower, and in the coming years, additional customs duties and regulatory duties are expected to be phased out entirely, a shift that could make survival genuinely difficult for some assemblers. Used car imports may rise as a result, and the risk of dumping in the local market cannot be ruled out.
The outlook for many of the newer entrants into Pakistan’s auto sector is not particularly encouraging. As one industry observer put it rather memorably, autos have become the new cement for local business families: everyone wants a seat at the table, but the actual returns on offer are limited. It remains to be seen just how long this particular party continues.
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