IMF disagrees with 1% NEV sales tax

Inter-ministerial disagreements over duty structure threaten auto policy finalisation

ISLAMABAD:

The International Monetary Fund (IMF) has not accepted a proposal to charge a 1% sales tax on new energy vehicles, including electric vehicles, amid heightened uncertainty about the fate of the new auto policy due to inter-ministerial disagreements over the duty structure.

The government on Thursday proposed to the IMF that the sales tax on hybrid vehicles be set at 50% of the 18% standard rate, and a 1% sales tax be charged on new energy vehicles, according to sources.

The lack of agreement among ministries involved in formulating the Auto Policy 2026-31 and the IMF's refusal to allow reduced sales tax rates have made it challenging to finalise the policy before June 24. Any change in sales tax and import duties must be incorporated in the budget, which the National Assembly is expected to pass on Wednesday. The existing auto policy expires this month, and no final draft is ready for incorporation in the tax laws, saidsources.

Government officials told The Express Tribune that tax and duty structure proposals were shared with the IMF on Thursday. They said that the IMF once again did not agree to any of these proposals and sought more clarifications. Special Assistant to Prime Minister on Industry Haroon Akhtar Khan declined to comment whether the IMF has rejected the proposal to charge 1% sales tax on hybrid and electric vehicles.

Finance ministry officials said the IMF turned down the proposal to reduce the sales tax rate for all types of vehicles, including electric vehicles, and wanted the standard sales tax rate to apply, with any price reductions given through direct subsidies.

The IMF's resident representative did not respond to a request for comment.

Sources said internal meetings to firm up the government's position on the auto policy, including those chaired by Deputy Prime Minister Ishaq Dar, remained inconclusive. One reason for the lack of clarity was that the industry ministry did not seek inter-ministerial consultation under Rule 8 of the Rules of Business.

Due to the lack of following laid down procedures, there is now serious disagreement between the Ministry of Commerce and the Ministry of Industry – the two key stakeholders. The commerce ministry is the custodian of the National Tariff Policy, while the auto policy is the responsibility of the industry ministry. However, the auto policy must align with the National Tariff Policy, now in its second year of implementation. When contacted, the commerce ministry said only the industry ministry can comment on auto policy issues.

Sources said the industry ministry proposed that new energy vehicle-specific parts may attract 1% customs duty for three years and 5% from year four onwards, with sales tax on imports of these parts exempted during the policy periodAccording to the proposal, sales tax on local supply and sale of NEVs is proposed at 1% for five years. The Ministry of Industry also proposed that the federal excise duty, capital value tax and withholding taxon the sale of NEVs during policy period should be exempted.

The industry ministry has faced criticism for proposing tax exemptions and concessions for the automobile sector despite slow progress on vehicle localisation. One disagreement between both ministries is that the industry ministry wants higher import duties on locally assembled vehicles, while the commerce ministry wants to implement the National Tariff Policy capping maximum customs duty at 15% by 2030.

The industry ministry argues that the 15% cap was not an IMF condition, which simply requires a weighted average tariff below 6%, achievable even with duties as high as 50%. However, according to the policy approved by the federal cabinet, the 20-50% customs duties for 2026-27 will be reduced to 15% in 2030. Likewise, the current 20% duty slab will be 10% in 2030 and the 15% slab will go down to 5%.

Localisation remains restricted to peripheral, low-tech components, with high-value, capital-intensive components remaining imported. Industry players argue that low production is due to a lack of localisation of value-intensive parts, requiring economies of scale estimated at 500,000 units annually to justify fixed investment in tooling and research and development.

The draft policy proposes localisation of up to 85% domestic value addition for 2-3 wheelers, including L6 and L7 category EVs, by 2030, to be met through local assembly of core EV components including battery packs, electric motors and controllers. Companies failing to achieve these milestones shall not be eligible for tariff concessions as enumerated in this policy and shall be immediately suspended, according to the draft policy.

The policy prioritises immediate localisation efforts for components currently imported, explicitly shifting focus towards complex system manufacturing. The priority components include critical systems across various segments: internal combustion engine and hybrid components (engines, transmissions, crankshafts, transmission housings, oil pumps, fuel injection components and shock absorbers) and new energy vehicle components (electric motors, battery management systems sub-modules, power electronics, motor housing and battery packs).

To promote new energy vehicles, the industry ministry has proposed heavy levies on combustion engine cars, with ad valorem levies of 5% on cars worth Rs15-20 million, 10% on Rs20-25 million, and 15% on vehicles above Rs25 million.

The policy recommends that the maximum depreciation rate of 30% be locked for all used motor vehicles imported into Pakistan, including vehicles older than three years but not older than 50 years from their original manufacturing date.

The draft policy also proposes that Statutory Regulatory Orders, including SRO 655, SRO 656 and SRO 693, alongside associated exemptions under the Fifth Schedule of the Customs Act 1969, be reviewed and gradually phased out by 2030.The Industry Ministry is of the view that gradual phasing out will help reduce the weighted average applied tariff to under 6% by June 2030, effective from July 1, 2026. This process will affect customs duties, additional customs duties and regulatory duties on all automotive completely built units, completely knocked down units, parts, components and raw materials.