The government’s approval of the draft Automotive and Auto Parts Manufacturing Policy 2026-31 marks a potentially transformative moment for Pakistan’s automotive sector.
Approved by Prime Minister Shehbaz Sharif and awaiting final clearances from the federal cabinet, the IMF, and parliament, the proposed framework signals a fundamental shift from a protected, domestic-market-oriented industry to an export-driven, competitive, technology-focused ecosystem.
At the heart of the policy lies an ambitious export agenda. The government has set a cumulative export target of about $6 billion over the next five years, covering passenger vehicles, SUVs, tractors, motorcycles, three-wheelers, and auto parts. To achieve this objective, manufacturers will be required to meet mandatory export commitments, with performance-linked incentives and penalties for non-compliance. If successfully implemented, the policy could help integrate Pakistan’s automotive industry into regional and global value chains while generating valuable foreign exchange earnings, we believe.
Another key pillar of the proposed policy is tariff rationalisation. Average customs duties are expected to gradually decline to around 15 per cent by the end of the policy period, while longstanding concessions and special tariff regimes are set to be phased out. Such measures are designed to enhance competition, improve consumer choice, and encourage manufacturers to become more efficient.
However, they may also increase pressure on local assemblers and parts makers that have historically benefited from a highly protected market structure. The policy strongly promotes New Energy Vehicles (NEVs), reflecting global trends towards sustainable mobility.
Proposed sales tax rates of 1 per cent for Battery Electric Vehicles (BEVs), 6 per cent for Range-Extended Electric Vehicles (REEVs), and 9 per cent for Plug-in Hybrid Electric Vehicles (PHEVs), compared with 18 per cent on conventional Internal Combustion Engine (ICE) vehicles, are intended to accelerate EV adoption.
Additional incentives, including reduced import tariffs for affordable EVs and higher vehicle financing limits, could significantly improve consumer access.
To finance export incentives and industrial development initiatives, the government has proposed an Automotive Development Levy (ADL), expected to generate Rs232 billion over five years.
While the levy will support the Drawback of Local Taxes and Levies (DLTL) scheme and technology upgrading, it may partially offset the benefits of lower tariffs for certain vehicle categories.
As AHL Research highlights, the policy’s success will ultimately depend on execution. Export competitiveness, localization targets, quality standards, and international market development remain critical challenges.
Nevertheless, if implemented effectively, the Auto Policy 2026-31 could reshape Pakistan’s automotive landscape, transforming it from a protected domestic industry into a globally competitive manufacturing and export sector.
