Pakistan’s proposed Automotive and Auto Parts Manufacturing Policy 2026-31 seeks to transform the country’s automobile sector from a protected domestic industry into an export-oriented, globally competitive manufacturing base, according to an analysis by AL Habib Capital Markets Pvt Ltd. The draft policy, approved by Prime Minister Shehbaz Sharif on October 20, 2026, introduces a comprehensive framework centered on export promotion, tariff rationalization, localization, and incentives for New Energy Vehicles (NEVs). However, the policy remains subject to federal cabinet approval, IMF clearance, and parliamentary endorsement before the government can implement its fiscal measures.
AL Habib Capital Markets noted that mandatory export targets are among the most significant structural changes proposed under the new framework. The government is targeting vehicle exports of around $6 billion and auto parts exports of $1.2 billion by FY31. Combined exports of vehicles and parts are projected to rise from $256.6 million in FY27 to $2.19 billion by FY31.
Under the proposed regime, automakers would be required to meet export commitments to qualify for incentives. Failure to achieve prescribed targets could result in financial penalties and, in cases of continued non-compliance, cancellation of manufacturing certificates. The policy is expected to encourage technology upgrades, improved product quality and stronger integration into global automotive supply chains.
The report observed that success will largely depend on domestic assemblers and parts manufacturers’ ability to develop sustainable overseas markets while meeting international quality and regulatory standards.
The proposed policy also outlines a phased reduction in customs duties on Completely Built-Up (CBU) vehicles and Completely Knocked-Down (CKD) kits. Customs duties on conventional vehicles are targeted to decline to 15% by FY31, while the government expects to gradually withdraw various special concessions and exemptions.
For the NEV segment, imported vehicles priced below $15,000 may qualify for a reduced customs duty of 5% during the first two years of the policy. In addition, selected non-localized EV components imported in CKD form would attract only a 1% tariff. According to AL Habib Capital Markets, these measures could improve consumer affordability, increase market competition, and facilitate technology transfer, although greater import competition may challenge existing assemblers and local vendors.
The policy further seeks to accelerate electric vehicle adoption through a differentiated tax structure. Battery Electric Vehicles (BEVs) would attract a preferential sales tax rate of 1%, while Range-Extended Electric Vehicles (REEVs) and Plug-in Hybrid Electric Vehicles (PHEVs) would be taxed at 6% and 9%, respectively. Conventional internal combustion engine vehicles and standard hybrids would continue to face an 18% sales tax.
To encourage financing and consumer access, the maximum auto financing limit is proposed to increase from Rs3 million to Rs10 million, with the repayment period extended from three years to five years. Analysts believe these measures could significantly improve affordability for smaller EVs and support market penetration, particularly as charging infrastructure continues to develop.
The draft policy also proposes a 10% Federal Excise Duty (FED) on NEVs valued above $75,000 and higher FED rates for large-engine conventional vehicles exceeding 2,000cc, reinforcing the government’s objective of promoting cleaner mobility solutions.
To fund export incentives and industrial development initiatives, the government plans to introduce an Automotive Development Levy (ADL), expected to generate approximately Rs232 billion over five years. Vehicles up to 1,000cc would remain exempt, while models between 1,000cc and 2,000cc would be subject to a 2% levy. Vehicles above 2,000cc would generally attract a 10% levy.
According to AL Habib Capital Markets, levy proceeds would support the Drawback of Local Taxes and Levies (DLTL) scheme, technology modernization programs, and broader industrial development initiatives aimed at improving export competitiveness.
Market observers view the proposed automotive policy as one of the most ambitious reform packages introduced for the sector in recent years. If approved in its current form, the framework could reshape Pakistan’s automotive landscape by encouraging exports, supporting localization, promoting electric mobility and gradually exposing the industry to greater international competition. However, successful implementation will depend on regulatory approvals, policy continuity, and the industry’s ability to adapt to a more competitive, export-focused environment.
