Budget 2025-26: auto sector faces mixed fortunes amid tariff reforms, carbon tax

Business Recorder

2 days ago

Pakistan's auto sector navigated a complex landscape following the announcement of the federal budget for 2025-26, as Finance Minister Muhammad Aurangzeb unveiled a raft of tariff reforms aimed at aligning with global trade norms and International Monetary Fund (IMF) recommendations.
While the government touts these reforms as steps toward export-led growth and trade liberalisation, industry stakeholders are voicing concerns about the adverse impact on local manufacturing.
Under the new budget, Additional Customs Duty (ACD) and Regulatory Duty (RD) are set to be reduced to zero by 2030. The fifth schedule will be eliminated, and Customs Duty (CD) will be capped at 15%.
Budget 2025-26: Pakistan targets 4.2% growth as Aurangzeb presents proposals 'for a competitive economy'
It will be reduced to zero percent by 2030. These changes, according to the government, are part of a long-term National Tariff Programme aimed at boosting exports and ensuring smoother access to global supply chains.
However, domestic players fear the reforms could weaken Pakistan's already fragile local manufacturing base.
'The new carbon tax will increase vehicle prices, while reduced RD on imported cars will make them cheaper — making imports more attractive and local manufacturing less competitive,' a senior official from a local car manufacturing company said.
Meanwhile, Mashood Khan, an auto sector expert, warned that the reforms reflect IMF directives rather than domestic industrial priorities.
'The downward trend in ACD, RD, and CD will likely hit local manufacturing instead of boosting exports. Without a thriving domestic industry, our import bill will rise and foreign reserves will suffer,' he said, urging the finance minister to revisit the policy before parliamentary approval.
Khan added that auto parts and related industries would face significant challenges without a clear strategy to support industrialization. 'It's unclear how exports will grow without strengthening the local base,' he noted.
Offering a more optimistic view, Shafiq Ahmed Shaikh, an automobile consultant and former Pak Suzuki official, welcomed the overhaul. 'This is a good move. A gradual reduction in duties will help Pakistan integrate with global markets and secure better FTAs and PTAs,' he said.
He noted that duties could fall from 20% to 15% over the next five years and emphasised that aligning tariffs with international norms would bring policy stability and encourage export-oriented investments.
However, Shaikh cautioned that the removal of the 12.5% concessional sales tax on vehicles under 850cc would hurt lower- and middle-income consumers.
The standard 18% sales tax will apply, increasing prices of small hatchbacks. Pak Suzuki, which leads the market in this segment due to its Alto 660cc, will be most affected.
Aurangzeb defended the move, arguing that automakers were not passing on the tax benefit to consumers, making the concession ineffective.
Key highlights of Pakistan budget for 2025-26
Osama Naeem, an auto analyst at AKD Securities, said, 'RD on vehicles above 3,000cc will be slashed from 90% to 50%, but details for lower engine sizes are awaited. This reduction in RD will hurt local assemblers who face competition from cheaper imports.'
He further said the ACD cut would impact imported completely built units (CBUs) more than local manufacturers, as the latter apply it primarily on parts and raw materials.