The federal government has decided to revisit a proposal to increase the sales tax on smaller, locally assembled cars. Reports indicate a possible imposition of taxes on vehicles with engine capacities of up to 850cc.

 

These claims come despite Islamabad scrapping the idea just last week. According to a report, insiders familiar with the ongoing budget planning have stated that the earlier decision to hold off on the tax hike has been overturned and that the revised rates are being prepared for inclusion in this year’s Finance Bill. 

 

If passed, the new rates on the aforementioned vehicle type could fall anywhere between 15 and 18 percent. This marks a steep increase from the current sales tax rate these vehicles are subjected to, a relatively conservative 10 to 12.5 percent.

 

Reports suggest that lawmakers need to boost revenue levels during fiscal year (FY) 2025-26. With the budget for FY 2025–26 looming, officials are under mounting pressure to find new cash flows. The International Monetary Fund (IMF) wants Islamabad to increase revenues, as it has asked the federal government to incorporate agricultural income tax into provincial budgets, along with the expectation that provincial governments will observe austerity measures.

 

Raising taxes on small cars has remained unpopular, as it erodes the purchasing power of households that aren't wealthy. Details for reports highlight that historically, small engine vehicles have been subjected to lower tax rates, keeping them within reach for working-class and middle-income households.

 

This spells bad news for domestic automobile assemblers as well, as a spike in taxes is likely to translate into higher car prices, which could reduce sales volumes. Sales volumes only recovered as inflation rates normalised in the outgoing FY, coupled with the State Bank of Pakistan (SBP) cutting interest rates to a conservative 11 percent. However, sales may tank upon the implementation of a tax hike.

 

If approved, the higher sales tax on small cars may lock a large segment of potential buyers out of the market for cars. Higher costs might potentially even cause some buyers to abandon purchasing a car altogether if prices rise significantly.

 

However, it merits a mention that a formal announcement is yet to be made. Buyers may scramble to place purchase orders before the announcement of the budget to avoid bearing higher sales tax rate.