Auto policy’s mixed signals

Pakistan’s automobile industry is facing fresh uncertainty after tariff changes under the government’s IMF-backed reform programme sharply reduced the gap between duties on imported fully built vehicles and locally assembled models, according to a report in Dawn Business.

The move has narrowed the protection available to local assemblers to about 15 percentage points, a shift that industry executives say is already changing the economics of vehicle production in Pakistan. For years, auto policy relied on higher duties on imported completely built-up vehicles to encourage companies to invest in local assembly, parts localisation and vendor development. That model, the industry argues, is now under pressure.

A chief financial officer at one car company, speaking anonymously, said firms that built assembly plants under the 2016-21 and 2021-26 auto policies now face much tougher competition from imported vehicles with lower overall duty incidence. He warned that local assembly could become less viable, with possible consequences for jobs, suppliers and foreign exchange use if demand shifts further toward imports.

Indus Motor Company chief executive Ali Asghar Jamali said the revised structure has created an anomaly in which bringing in a fully built car can cost less than importing kits for local assembly. He said that temporarily weakens the case for assembling vehicles domestically, though he expects the government to address the issue.

The concerns come as the industry reaches a policy gap. The Auto Industry Development and Export Policy 2021-26 expired on June 30, but its replacement has not yet been finalised. That uncertainty has coincided with changes in tax treatment for hybrid and electric vehicles.

The government has extended a 1pc sales tax concession for locally assembled smaller electric vehicles with battery capacities of up to 50kWh, as well as light commercial EVs up to 150kWh, until June next year. But incentives for hybrids have ended. Sales tax on locally assembled hybrid and plug-in hybrid vehicles above 1,400cc has risen to 25pc, while hybrids below 1,400cc now face an 18pc rate.

Industry representatives say the new rates have erased much of the price advantage that hybrids previously enjoyed over conventional petrol models. The anonymous CFO said several manufacturers have already paused CKD imports pending greater policy clarity, adding that auto investment requires long-term certainty because capital is typically committed for 15 to 20 years.

Not everyone in the sector sees the change as a shock. Mr Jamali said the previous policy had simply run its course and the return to normal sales tax rates was predictable. In his view, the government must either extend incentives formally or issue a new policy that clearly defines the next phase of support.

Former Pakistan Association of Automotive Parts and Accessories Manufacturers chairman Syed Nabeel Hashmi argued that tariff rationalisation should not be allowed to hollow out domestic industry. He said lower duties should improve efficiency and competitiveness, not remove the business case for manufacturing in Pakistan.

The issue is also broader than car prices. The auto sector supports more than 2,000 parts manufacturers and tens of thousands of workers. A sustained tilt toward imports, the industry says, could weaken local supplier networks, discourage technology transfer and reduce industrial capacity built over decades.

The debate now centres on whether Pakistan wants to use tariff reform mainly to expand imports or to support a managed transition that still encourages local value addition. The government’s flexibility is limited by its IMF commitments, but industry voices say some compromise is still possible, including a lower tax rate for hybrid technologies such as plug-in hybrids.

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