PM Approves Automotive Industry Development Policy 2026-31

ISLAMABAD: Prime Minister Muhammad Shehbaz Sharif has given in-principle approval to the Automotive Industry Development Policy (AIDP) 2026-31, introducing a new framework aimed at promoting exports, localisation and domestic value addition in Pakistan’s automotive sector.

The policy, prepared by an inter-ministerial steering committee, will operate alongside the New Energy Vehicles (NEV) Policy 2025-30 and replace the previous automotive policy that expired on June 30, 2026.

Under the five-year framework, the government expects cumulative foreign exchange savings of $17.7 billion through localised completely knocked-down (CKD) assembly, while vehicle and auto-parts exports are projected at $4.586 billion.

The policy also targets the protection of 2.5 million jobs and a net fiscal surplus of Rs21.11 billion.

The new framework proposes a simplified four-tier customs duty structure of 0%, 5%, 10% and 15%, reducing the weighted-average import tariff from 15.7% to 5.99% by 2030.

Customs duties on completely built-up (CBU) vehicles will be gradually reduced by fiscal year 2030-31. Rates will reach 35% for vehicles up to 850cc, 40% for 851-1,000cc, 45% for 1,001-1,500cc, 77% for 1,501-1,800cc and 115% for vehicles above 1,800cc.

The duty on hybrid CBUs will be reduced to 15%, while new energy vehicles will retain a flat 15% duty. Regulatory and additional customs duties will also be eliminated by FY31.

For CKD imports, duties on non-localised parts will fall to 10%, while duties on localised parts will be reduced to 15%. Customs duties on raw materials will be eliminated.

The framework proposes an 18% general sales tax across vehicle categories. Green-vehicle incentives will instead be provided through direct subsidies under the Rs100.36 billion Pakistan Accelerated Vehicle Electrification (PAVE) programme, which will be financed through a 1-3% levy on internal-combustion-engine vehicles.

The government aims to increase the share of electric vehicles to 30% by 2030. Localised NEVs will attract a 1% kit duty until June 2027 and will remain exempt from federal excise duty.

Under the State Bank’s green auto-financing scheme, the maximum loan limit will be increased to Rs10 million, with repayment periods of up to seven years.

The PAVE programme will provide subsidies of Rs65,000 for e-bikes, up to Rs400,000 for three-wheelers and Rs15,000 per kWh for commercial fleets. The programme also plans to establish 3,000 public charging stations.

To prevent low-value assembly, the Engineering Development Board will enforce a quantitative Minimum Domestic Value Addition (MDVA) regime. By FY2030-31, the targets will reach 40% for passenger cars, 45% for light commercial vehicles, 80% for tractors, 90% for bikes and rickshaws, and 15% for NEVs.

Access to concessionary CKD duties will also be linked to export performance. Passenger-car original equipment manufacturers (OEMs) will be required to increase exports to 12% of their production value, equivalent to $596.1 million, by FY31.

Companies failing to meet the export targets will face customs penalties linked to their shortfall, while exporters will be eligible for rebates of up to 15% under the Duty Drawback of Local Taxes and Levies (DLTL) scheme.

The policy further proposes restricting commercial imports of used vehicles up to five years old to active corporate tax filers with 3S (sales, service and spare-parts) networks. A 40% regulatory tariff will initially apply and will be gradually phased out by 2030.

The framework also calls for enforcement of 62 UNECE safety standards and the establishment of an Auto Parts Export Council to promote international sales of locally manufactured components.

Following the prime minister’s in-principle approval, the policy will be submitted to the Economic Coordination Committee and the federal cabinet for final approval. The final process will also include reviews under Pakistan’s commitments with the International Monetary Fund (IMF).