Govt to Increase Sales Tax on Small Cars in Upcoming Budget

If you’re thinking about buying a small car in Pakistan, now might be the right time. That’s because from July 1, 2025, the prices of locally manufactured or assembled cars with engine capacities of up to 850cc will increase. This includes popular entry-level cars that many middle-income families prefer due to their affordability and fuel efficiency.

The reason behind this expected price hike is a planned change in the sales tax policy. Currently, the government charges a reduced sales tax rate of 12.5% on cars with an engine size of 850cc or less. This lower rate was introduced as a relief measure to support the local auto industry and to make small cars more affordable for the average Pakistani household.

However, things are about to change. According to sources close to the matter, the government has agreed in principle to increase the sales tax rate for these vehicles. In the upcoming federal budget for the fiscal year 2025–26, the sales tax is expected to rise from 12.5% to somewhere between 15% and 18%. While the exact percentage is still under discussion, one thing is clear: car prices will go up once this tax hike is officially approved.

This increase is part of a broader effort by the government to boost tax revenues in the new financial year. With growing economic challenges and the need to meet budget targets, the government is looking to end several tax exemptions and discounts that were previously in place.

To make this change official, the Federal Board of Revenue (FBR) plans to amend the Sales Tax Act of 1990. Specifically, they are expected to remove Entry Number 72 from the Eighth Schedule of the Act. This particular entry allows a concessionary tax rate on small, locally made cars. Once this entry is deleted, these vehicles will no longer enjoy the tax break and will be taxed at the standard rate like other vehicles.

This decision will impact not only car buyers but also local car manufacturers and assemblers. Auto companies may see a drop in demand for their smaller models, as higher taxes will lead to higher prices. Many customers who were planning to buy an affordable car might now be forced to delay their purchase or consider second-hand options instead.

In addition, this change may also affect the used car market, as more people turn to older models to avoid the extra cost. Dealers in second-hand vehicles could see an increase in business, while buyers may find it harder to get new vehicles within a limited budget.

For families looking to buy their first car, this could be disappointing news. Small cars, especially those under 850cc, are often chosen for their low maintenance costs, better fuel economy, and lower registration and insurance fees. But with this new sales tax policy, the total cost of owning a car will increase significantly.

What You Should Do

If you are planning to buy a new small car soon, you may want to make the purchase before July 1, 2025, to avoid paying the higher sales tax. Car dealerships might also offer pre-budget deals or discounts before the new rates are implemented, so keeping an eye out for such offers could help you save some money.

This change also highlights the importance of staying informed about government budget decisions, especially those that can affect everyday expenses like transport.

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