ISLAMABAD – After sharp increase in sales tax pushed hybrid vehicles into costlier bracket, the federal government is now considering a policy reversal. Officials are weighing a proposal to reduce the sales tax on hybrid electric vehicles (HEVs) to pass on relief to buyers and revive demand in the country’s hybrid auto market.
Amid criticism, the government is considering reduction in the sales tax on hybrid electric vehicles (HEVs), with a proposal to cut the rate from 25 percent to 18 percent now under review. A summary seeking the tax cut has already been forwarded to the Finance Division. If endorsed, the proposal will be placed before the federal cabinet for final approval before it can be implemented.
The move comes just weeks after the concessional tax regime for hybrid vehicles came to an end. The reduced sales tax remained available until June 30, 2026, but lapsed automatically after the government opted not to extend the incentive through the Finance Act 2026.
Before the concession expired, hybrid vehicles were taxed at a preferential rate of 8.5 percent. Following the withdrawal of the relief, HEVs were shifted to Schedule II of SRO 297(I)/2023, bringing them under the standard 25 percent sales tax regime.
Officials reassessed the impact of the higher tax on the hybrid vehicle market. The sharp increase is believed to have affected consumer demand, prompting the government to explore a revised rate of 18 percent as part of efforts to revive the segment. If approved by the cabinet, the proposed reduction is expected to provide relief to prospective buyers while supporting the government’s broader objective of accelerating the adoption of cleaner and more fuel-efficient vehicles across the country.
Locally assembled hybrid electric vehicles (HEVs) and plug-in hybrid electric vehicles (PHEVs) enjoyed reduced sales tax rates for models below 1800cc and 12.75 percent for those with larger engines. However, after the concession expired and was not extended through the Finance Act 2026, hybrid vehicles automatically shifted to the standard sales tax regime, making them subject to a 25 percent tax.
The higher tax created uncertainty in the auto industry, with several manufacturers reportedly delaying invoices until the government clarifies the applicable tax rate under a new auto policy.
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