IMF Rejects Proposed 1% Sales Tax on Electric Vehicles

The International Monetary Fund (IMF) has opposed Pakistan’s proposal to impose a reduced 1 percent sales tax on new energy vehicles, including electric vehicles, creating fresh uncertainty over the finalization of the country’s upcoming auto policy.

According to the Express tribune report, Pakistan proposed setting the sales tax on hybrid vehicles at half of the standard 18 percent rate and charging a 1 percent sales tax on new energy vehicles. However, the IMF reportedly rejected the proposal and sought additional clarifications.

The disagreement comes as the government races to finalize the Auto Policy 2026-31 before the current policy expires at the end of June. Officials said unresolved differences between the Ministry of Industries and the Ministry of Commerce over tariff structures have further complicated efforts to complete the policy by June 24.

The Ministry of Industries has proposed a range of incentives to encourage electric vehicle adoption, including a 1 percent customs duty on imports of EV specific parts for the first three years, exemption from sales tax on imported components, and a 1 percent sales tax on locally assembled and sold new energy vehicles for five years. It has also recommended exemptions from federal excise duty, capital value tax, and withholding tax on EV sales during the policy period.

Finance Ministry officials said the IMF prefers maintaining the standard 18 percent sales tax on all vehicles and providing any incentives through direct subsidies instead of reduced tax rates.

The draft policy also seeks to accelerate localization, targeting up to 85 percent domestic value addition in two and three-wheeler vehicles, including electric vehicle categories, by 2030. At the same time, it proposes higher levies on expensive internal combustion engine vehicles to encourage a gradual shift toward cleaner transportation.

Pakistan’s existing auto policy expires this month, and any changes in sales tax or import duties must be incorporated into the Finance Bill 2026-27, which is expected to be passed by the National Assembly next week.