Is Pakistan’s Automotive Policy 2026-31 a Game-Changer for the Sector?

Introduction

The proposed Automotive and Auto Parts Manufacturing Policy 2026-31, drafted by an inter-ministerial committee headed by Minister for Power Sardar Awais Ahmad Khan Leghari, represents a structural shift from protection-led growth to export-oriented, localized, and NEV-focused development. If implemented, the policy will fundamentally alter the operating environment for original equipment manufacturers (OEMs), auto parts makers, and consumers over the five years from 2026 to 2031. The framework rests on seven broad principles: export growth, higher localisation, NEV incentives, competition and efficiency, tariff rationalisation, and moving away from discretionary SROs. Export performance and domestic value addition are positioned as key conditions for continued access to policy benefits.

What Are the Mandatory Export Targets for OEMs?

A central feature of the proposal is a mandatory export regime for OEMs, supported by legally enforceable targets and penalties for non-compliance. Car, jeep, and SUV manufacturers would be required to increase exports from zero in 2026-27 to 12% of factory-gate production value by 2029-30, with the same target applicable in 2030-31. The corresponding export values are estimated at US$160.9mn in 2027-28, US$347mn in 2028-29, US$558.2mn in 2029-30, and US$596.1mn in 2030-31. For tractors, export targets would increase from 5% in 2026-27 to 15% by 2030-31, while bikes and rickshaws would move from zero to 15% over the same period. Overall, mandatory OEM exports are estimated to generate US$2.39bn cumulatively during the policy period. Auto parts manufacturers would also face significantly higher export targets, with exports projected to rise from US$240mn in 2026-27 to US$700mn by 2030-31, translating into cumulative exports of approximately US$2.20bn. Combined OEM and auto-parts exports are therefore projected at US$4.59bn over 2026-31. Export targets would become a condition of manufacturing licenses. Failure to meet the prescribed targets could result in additional customs duty on imported CKD kits equivalent to the export shortfall, while persistent non-compliance could ultimately lead to cancellation of the manufacturing license.

Fiscal Year	OEM Exports	Parts Exports	Total
2026-27	$0	$240M	$240 Million
2027-28	$160.89M	$310M	$470.89 Million
2028-29	$347M	$400M	$747 Million
2029-30	$558.20M	$550M	$1.108 Billion
2030-31	$596.10M	$700M	$1.296 Billion
CUMULATIVE	$2.391B	$2.195B	$4.586 Billion

How Will the DTL Scheme Support Export Growth?

To incentivize exports, eligible OEMs and parts manufacturers would receive 10% of net FOB export value as baseline support, with an additional 5% available where export value increases by at least 5% year-on-year. The scheme would be funded through Federal Excise Duty (FED) imposed on internal-combustion-engine vehicles. Total FED collections during 2026-31 are estimated at approximately Rs349bn, compared with DTL disbursements of around Rs191bn. Payments would be conditional on the realization of export proceeds through the State Bank of Pakistan and would remain subject to third-party audits.

What Is the Minimum Domestic Value Addition (MDVA) Regime?

The proposed policy introduces a Minimum Domestic Value Addition (MDVA) framework to quantitatively measure localization across the automobile value chain. MDVA would be calculated based on local materials and parts, domestic labor, and eligible factory overheads, carrying weights of 75%, 10%, and 15%, respectively. For conventional cars, the minimum domestic value addition requirement would gradually increase to 40% by 2030-31. Requirements for conventional LCVs, trucks, and buses would rise to 45% and 40%, respectively, while tractors would require 80% localization. Bikes and rickshaws would face the highest requirement at 90% by 2030-31. For NEVs, the MDVA requirement would initially remain relatively low at 10%, increasing to 15% by 2030-31, providing manufacturers with greater flexibility during the early stages of NEV adoption. Manufacturers and Tier-1 parts producers would be required to submit detailed information covering bills of material, country of origin, suppliers, acquisition costs, payroll, and factory expenditure. Domestic value-addition statements would be submitted semi-annually and subject to risk-based third-party audits. Non-compliance could attract a levy of up to 10% on imported parts, while persistent non-compliance for two consecutive years could result in termination of the manufacturing license.

Vehicle Category	MDVA Target by 2030-31
Conventional Cars	40.0%
Conventional LCVs	45.0%
Conventional Trucks & Buses	40.0%
Conventional Tractors	80.0%
Bikes & Rickshaws	90.0%
New Energy Vehicles (NEVs)	15% (from 10% initial)

How Will Tariff Rationalization Increase Competition?

The committee has proposed a substantial restructuring of automobile tariffs, targeting up to 80% reduction in tariffs, alongside the eventual elimination of Regulatory Duty (RD) and Additional Customs Duty (ACD). The proposed structure would be aligned with the National Tariff Policy, with a one-year lag for implementation in the automobile sector from FY2026-27. Tariffs would subsequently be reviewed after two years, taking into account energy costs, taxation, interest rates, exchange-rate flexibility, and export performance. New tariff lines would also be introduced for NEV trucks, buses, tractors, and L6/L7-category vehicles, alongside technical-skills development programs focused particularly on NEVs. Conventional vehicle tariffs are expected to decline progressively through 2030-31. However, the benefit from tariff rationalization would partly be offset by additional FED on conventional vehicles.

Component	Proposed Change	Timeline
Overall Tariff	Up to 80% reduction	Progressive to 2030-31
Regulatory Duty	Elimination	Phased by 2030-31
Additional Customs Duty	Elimination	Phased by 2030-31
SROs	Phased out	By FY 2029-30
Tariff Review	Biennial review	After 2 years

What Are the NEV Incentives and How Will They Be Funded?

The proposed framework places considerable emphasis on accelerating adoption of NEVs. The committee has agreed to equal treatment for BEVs, REEVs, and PHEVs under the proposed NEV policy. The package includes a 1% sales tax on NEVs, parts, and raw materials, alongside exemptions from FED, CVT, and withholding tax on NEVs. To partially offset the resulting revenue impact, additional FED would be imposed on conventional vehicles. The committee has also proposed increasing the financing limit for NEV purchases from Rs3mn to Rs10mn, while extending the financing tenor from three to five years. HEVs (non-plug-in hybrids), meanwhile, would be treated at par with conventional vehicles for tariff and sales tax purposes. Import duty on charging stations would be reduced to 1%, while battery-swapping stations could receive support through viability-gap funding.

Incentive	NEVs (BEV, REEV, PHEV)	Conventional Vehicles
Sales Tax	1.0%	10-17%
Federal Excise Duty	Exempt	2.5-20% (additional)
Capital Value Tax	Exempt	Applicable
Withholding Tax	Exempt	Applicable
Financing Credit Limit	Rs10 Million	Rs3 Million
Financing Tenor	5 Years	3 Years

How Will Additional FED Finance Policy Incentives?

The proposed framework seeks to partly finance NEV incentives and export support through higher FED on conventional vehicles. Additional FED collections from locally produced vehicles are estimated at Rs301.1bn during 2026-31, with a further Rs48.9bn expected from imported vehicles, taking total additional FED collections to approximately Rs349.9bn. The highest proposed additional FED rate for locally produced vehicles is 20% for vehicles above 3,000cc, with lower rates applicable to smaller engine categories. While tariff rationalization and increased competition are expected to support vehicle affordability over time, the additional FED on conventional vehicles would partially dilute the benefit of lower customs duties. The committee estimates that prices of locally manufactured vehicles could remain broadly stable through 2029-30, assuming duties, taxes, and the rupee-dollar parity remain unchanged. Under the proposed structure, the estimated price of a Suzuki Alto is around Rs3.13mn, compared with approximately Rs3.55mn for the comparable Honri NEV. Similarly, the estimated price of a Honda Civic is Rs9.44mn versus Rs11.05mn for the Haval PHEV, while the Kia Sportage is estimated at Rs9.59mn compared with Rs9.99mn for the Deepal SO5.

 

Revenue Source	Amount	Expenditure	Amount
Additional FED – Local Production	Rs301.05B	DLTL Scheme	Rs191.03B
Additional FED – Imports	Rs48.88B	Tax Loss on PHEVs	Rs137.79B
TOTAL REVENUE	Rs349.94B	TOTAL COST	Rs328.83B
NET SAVINGS	Rs21.11B

What Is the Foreign Exchange Impact of Local Manufacturing?

The proposed policy is also expected to generate meaningful foreign-exchange savings by encouraging domestic manufacturing and value addition. The committee estimates that CBU vehicle imports during 2025-26 to 2030-31 would carry a cumulative CIF value of approximately US$38.75bn. In comparison, imports of CKD kits, parts, and raw materials required for domestic manufacturing are projected at US$21.09bn. This implies estimated FX savings of approximately US$17.70bn over the six-year period, increasing from US$2.57bn in 2025-26 to US$4.09bn by 2030-31.

Scenario	CIF Value	Impact
Importing as CBUs	$38.75 Billion	Higher outflow
Local Manufacturing (CKD)	$21.09 Billion	Lower outflow
FOREIGN EXCHANGE SAVINGS	$17.70 Billion	Net saving

What Is the Proposed Auto Parts Export Council?

The committee has proposed establishing an Auto Parts Export Council (APEC) to accelerate export development and integrate Pakistan’s auto-parts industry into global supply chains. The council would be headed by the Minister for Industries and Production and include senior officials from the Ministries of Industries and Commerce, TDAP, EDB, and three industry representatives. Its mandate would include positioning Pakistan as a low-cost auto-parts manufacturing destination, developing an export-enhancement strategy, identifying international markets, facilitating B2B engagements and exhibitions, improving quality and compliance standards, monitoring export targets, and addressing exporters’ operational constraints. The proposed framework would also allow contract manufacturing to utilize idle production capacity and calls for full digitalization of Engineering Development Board approval processes. Importantly, SROs would be phased out by FY2029-30 and replaced with transparent, rules-based instruments.

How Will Vehicle Standards and Consumer Protection Be Strengthened?

The policy proposes strengthening vehicle quality and consumer protection through greater alignment with international standards. The committee has agreed to adopt 62 UNECE WP.29 standards already incorporated in 2025, with a further 45 standards targeted for adoption by 2029. Legislation would also be introduced to provide a statutory basis for enforcing vehicle standards, while evaluation against these standards could be outsourced to internationally accredited agencies. A proposed Pakistan Auto Testing Institute would undertake essential vehicle testing, particularly to facilitate export development. Manufacturers would additionally be required to disclose sales-related information, including price changes and actual delivery dates. The proposed framework would also address post-booking price escalation by allocating the impact between manufacturers and consumers based on advance payments.

What Is the Timeline for Key Policy Milestones?

Timeline	Key Milestone
2026-27	Policy implementation; NEV incentives; tariff rationalization begins
2027-28	OEM export target: $160.89M; First MDVA reporting
2028-29	OEM export target: $347M; Parts exports: $400M; Tariff review
2029-30	SRO phase-out; OEM export: $558.2M; Parts exports: $550M
2030-31	All MDVA targets due; OEM exports: $596.1M; Parts: $700M; Total exports: $1.296B

What Are the Abnormal Elements in the Fiscal Balance Trajectory?

A critical observation from the policy document is the deteriorating annual fiscal balance despite a cumulative surplus. The committee estimates additional FED collections of approximately Rs349.9bn over 2026-31. Against this, the proposed DLTL scheme would require around Rs191.0bn, while the estimated revenue loss from reduced sales tax on PHEVs is approximately Rs137.8bn, resulting in a combined budgetary requirement of Rs328.8bn. On the committee’s estimates, this translates into a net fiscal saving of Rs21.1bn over the policy period. However, annual projections indicate that the fiscal position could deteriorate over time, with an estimated saving of Rs46.8bn in 2026-27 turning into a deficit of Rs44.1bn by 2030-31. This rising deficit is an abnormal element that warrants close monitoring, as it suggests the policy’s fiscal sustainability may be challenged in the later years.

Fiscal Year	Annual Balance	Cumulative Balance
2026-27	+Rs46.84B	+Rs46.84B
2027-28	+Rs18.25B	+Rs65.09B
2028-29	+Rs11.54B	+Rs76.63B
2029-30	-Rs19.57B	+Rs57.06B
2030-31	-Rs44.10B	+Rs21.11B

What Is the Regulatory Duty Phase-Out Schedule for Used Vehicle Imports?

Fiscal Year	Regulatory Duty Rate
2026-27	40%
2027-28	30%
2028-29	20%
2029-30	10%
2030-31	0%

What Are the Detailed Tariff Roadmaps Across Vehicle Categories?

The policy includes detailed tariff roadmaps for various vehicle categories, showing progressive reductions in import duties. For hybrid vehicles (CBU imports), duties would decline from 50% in 2026-27 to 30% by 2030-31 across all engine capacities. For conventional CBUs, reductions vary by engine size, with the largest absolute reduction for vehicles above 1800cc, falling from 156% to 115%.

Vehicle Category	Current Duty	Target Duty (2030-31)	Total Reduction
Hybrid Cars (All Engine Sizes)	50%	30%	-20%
Hybrid Trucks	30%	15%	-50%
Hybrid Buses	30%	15%	-50%
Hybrid LCVs	60%	30%	-50%
Conventional CBU (≤800cc)	56%	35%	-21%
Conventional CBU (851-1000cc)	71%	40%	-31%
Conventional CBU (1001-1500cc)	76%	45%	-31%
Conventional CBU (1501-1800cc)	91%	77%	-14%
Conventional CBU (>1800cc)	156%	115%	-41%
NEV 4-Wheelers	50%	40%	-10%
Used Vehicle Imports (RD)	40%	0%	-100%

What Is the MDVA Target Schedule by Vehicle Category?

Fiscal Year	Cars	LCVs	Trucks & Buses	Tractors	Bikes & Rickshaws	NEVs
2026-27	30%*	35%*	32%*	70%*	80%*	10%
2027-28	32%	37%	34%	72%	82%	11%
2028-29	35%	40%	36%	75%	85%	12%
2029-30	38%	43%	38%	78%	88%	13%
2030-31	40%	45%	40%	80%	90%	15%

What Is the Hybrid Vehicle Duty Reduction Schedule?

Engine Capacity	Current Duty	2026-27	2027-28	2028-29	2029-30	2030-31
Up to 800cc	50%	46%	42%	38%	34%	30%
851cc – 1,000cc	50%	46%	42%	38%	34%	30%
1,501cc – 1,800cc	50%	46%	42%	38%	34%	30%
Above 1,800cc	50%	46%	42%	38%	34%	30%

What Is the Market Positioning of Key Local Partners?

Local Partner	Manufacturer	Electrified Models	Market Position
Mega Motor Co.	BYD	Atto 2, Atto 3, Seal, Seal 7, Shark 6	Market Leader
MG JW Group	MG	Binguo, MG4, HS PHEV, HS Super Hybrid, Cybster	Pioneer
Master Group	Chery	Tiggo 7, 8, 9 PHEV	Aggressive Entrant
Nishat Group	Omoda & Jaecoo	E5 EV, J7 PHEV	Rapid Growth (200% YoY)
Master Group	Changan	Deepal S05, S07, L07	Emerging Challenger
Sazgar	GWM	Tank 500 PHEV, Haval H6 PHEV	Established Player
Indus and Honda	Toyota/Honda	Limited/None	At Risk

What Is the Analyst Take on the Structural Shift?

The proposed Automotive Policy 2026-31 represents a structural shift from protection-led growth towards a more competitive, export-oriented auto industry. Tariff protection is set to decline significantly, with up to 80% reduction intensifying competition among incumbent OEMs. Exports become critical, as OEMs face mandatory export targets, with non-compliance potentially affecting manufacturing licenses. Localization rises, as MDVA requirements will increase investment in local sourcing and manufacturing capabilities. NEVs gain policy support, with 1% sales tax and exemptions from FED, CVT, and WHT expected to improve NEV economics. The parts industry stands out, with US$2.2bn cumulative parts exports providing a significant opportunity to integrate into global supply chains. However, the pace of benefits will depend on OEMs’ ability to meet export and MDVA requirements, while higher FED on conventional vehicles could partly offset the benefit of lower tariffs. The deteriorating annual fiscal balance, turning from a surplus of Rs46.8bn in 2026-27 to a deficit of Rs44.1bn by 2030-31, is a key risk to monitor.

What Are the Key Data Points to Remember?

Metric	Value
Total Exports (2026-31)	$4.586 Billion
Foreign Exchange Savings (2025-31)	$17.70 Billion
Additional FED Collection	Rs349.94 Billion
DLTL Scheme Cost	Rs191.03 Billion
Net Fiscal Impact	+Rs21.11 Billion
OEM Export Target (2030-31)	12% (cars/SUVs)
MDVA Target – Cars (2030-31)	40%
MDVA Target – NEVs (2030-31)	15%
Tariff Reduction Target	Up to 80%

Conclusion

The proposed Automotive Policy 2026-31 represents a decisive shift from protectionism toward export-led growth, mandatory localization, tariff rationalization of up to 80%, and aggressive NEV incentives, with headline targets of US$4.586bn in cumulative exports and US$17.70bn in foreign exchange savings. However, execution risk remains high: OEMs must jump from zero exports to US$160.89mn in just one year, MDVA targets of **90%** for bikes and **80%** for tractors require deep supplier development, and the annual fiscal balance deteriorates from a surplus of Rs46.84bn in 2026-27 to a deficit of Rs44.10bn by 2030-31, raising sustainability concerns. While the auto parts segment, with a US$2.2bn export target, is the most credible near-term beneficiary, the policy’s success ultimately depends on implementation capacity, supplier upgrading, and genuine export competitiveness rather than mere compliance.

⚠️ This post reflects the author’s personal opinion and is for informational purposes only. It does not constitute financial advice. Investing involves risk and should be done independently. Read full disclaimer →