Govt scrambles to rethink auto tariff

As the government scrambled on Saturday to deal with a blow to its draft auto policy, the top-ranking commerce ministry official said vehicle tariffs are being determined while duly taking into account the principles of trade liberalisation laid out in the National Tariff Policy (NTP).

If the NTP is followed without deviation, customs duties on cars and jeeps and their parts will be slashed in the range of 25% to 50%, showed a presentation given to the National Assembly panel discussing the proposed budget. If this path is adopted, there will be a substantial reduction in tax burden, making vehicles cheaper, but car assemblers will face stiff competition.

"The auto tariffs are being determined while duly taking into account the principles laid out in the National Tariff Policy," said Jawad Paul, the secretary commerce, during the meeting of the National Assembly Standing Committee on Finance. PPP's Syed Naveed Qamar chaired the meeting.

The statement reiterated the principled position of the commerce ministry, which wanted to cut the maximum customs duty rate by half to 50%, the additional customs duty by 2% against each slab, and the regulatory duty to just 20% for fiscal year 2026-27. This brings the total maximum tariff limit to 74% compared with current rates of 156%. Sources said the gap of 82% is the bone of contention and the reason for the delay in finalising the new Auto Policy 2026-31.

The Express Tribune reported that the International Monetary Fund (IMF) did not endorse some proposals of the auto policy, and divergent views exist within the government. The government had proposed to the IMF that sales tax on hybrid vehicles should be 50% of the levied sales tax, and only 1% sales tax should be charged on new energy vehicles.

Sources said due to inter-ministerial disagreement and the IMF's objections, the government now faces a challenge to implement the new policy before the current one expires on June 30. It was becoming almost impossible to get National Assembly approval of the new tariffs before June 24.

The government was reviewing two main options: either bring down tariffs to 74% on the auto sector in line with the umbrella tariff policy, or cut tariffs to 74% and impose 82% federal excise duty to maintain protection. The second option would be a clear deviation from the auto policy, sources added. The National Assembly Standing Committee on Finance may make recommendations on Sunday.

There is so far no deviation from the approved NTP, and proposals for the second year (FY2026-27) are in line with the approved plan, the secretary commerce told the standing committee. Paul said there will be a series of cuts in customs duty, additional customs duty and regulatory duty against most of the 7,590 tariff lines during the second year. "The current maximum tariffs are 156% that will be brought down to 74%," he said.

Any change in sales tax and import duties must be incorporated in the budget, which the National Assembly may pass before Wednesday. The existing auto policy expires this month, and no final draft is ready for incorporation in tax laws, sources said.

NTP path for auto sector

Under the NTP for FY2026-27, the customs duty rate on auto parts would come down to 25% from 35%. Rates would go down to 30% from 50% on cars and jeeps up to 800cc. On up to 1,000cc vehicles, rates would fall from 55% to 35%. On up to 1,500cc cars, rates would drop to 40% from 60%, and on up to 1,800cc cars, tariffs would fall from 75% to 45%. On cars above 1,800cc, rates would fall to 50% from the current 100%. Sources said the Prime Minister's Office also did not want a reduction in prices of expensive vehicles over 2,000cc, and one option could be imposing federal excise duty on these vehicles.

One disagreement is that the industry ministry wants higher import duties on locally assembled vehicles, while the commerce ministry wants to implement the NTP capping maximum customs duty at 15% by 2030. The industry ministry argues 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 cabinet-approved policy, the 20-50% customs duties for FY2026-27 will come down to 15% in 2030. The current 20% duty slab will be 10% in 2030, and the current 15% slab will fall to 5%.

The secretary commerce informed the Senate committee that under the five-year NTP, simple average tariffs are targeted to reduce to 13% from July. However, tariffs would be 13.77%, still higher than target due to less reduction last year and adjustments. Last year, the government cut tariffs to 16.56%.

The total revenue impact of duty reduction during the second year of tariff reforms is Rs143.4 billion, said the secretary commerce. Responding to a question, he said the Engineering Development Board has also recommended levelling tariffs of locally made, imported and used cars to provide equal opportunities.

Paul said IMF conditions are much relaxed compared with NTP targets. "The IMF has allowed keeping the regulatory duty rate to 80% but the government approved abolishing it in five years," he added. "The IMF did not set the upper cap for customs duty but the government approved reducing it to 15% by 2030."