In a major move as part of the Budget 2025–26, the federal government has introduced a new tax targeting all petrol and diesel vehicles. The levy, applicable to both locally manufactured and imported internal combustion engine (ICE) vehicles, is aimed at curbing fuel-based transport use and possibly nudging the market toward electric alternatives.
According to the Finance Bill, the tax is structured based on engine capacity and applied as a percentage of the vehicle’s total price. Vehicles under 1300cc will be taxed at 1%, those between 1300cc and 1800cc at 2%, and cars above 1800cc at 3%. Additionally, a flat 1% levy will be imposed on all ICE vehicles, compounding the overall increase in car prices.
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The levy is set to be collected directly from manufacturers and importers, though the financial burden is expected to be transferred to consumers. Industry experts warn that higher-end and imported cars will be hit the hardest, potentially dampening sales and pushing already strained consumers further out of the market.
This development arrives at a challenging time for Pakistan’s auto sector, which is grappling with high production costs, limited imports, and declining demand. Analysts suggest that while the tax may seem modest on paper, its real-world impact on mid- to high-end vehicle prices could be substantial.
Speculation is also growing that the new policy is a precursor to a broader government push for hybrid and electric vehicles. However, without investment in EV infrastructure and buyer incentives, experts caution that any transition to cleaner transport may remain slow and limited in scope.
