The federal government has reduced the sales tax on locally manufactured hybrid electric vehicles (HEVs) with engine capacities of up to 2,000cc from 25 percent to 18 percent. The change was introduced through S.R.O. 1525(I)/2026 issued by the Finance Division on September 13, 2026, and took effect immediately. The notification amends the existing sales tax framework under S.R.O. 297(I)/2023, excluding qualifying locally manufactured hybrid vehicles from the provisions of Table-II that had subjected them to the higher 25 percent rate. The move provides a seven-percentage-point reduction for qualifying hybrid vehicles after their earlier tax concessions expired at the end of June.
Under the notification, the provisions of Table-II will no longer apply to locally manufactured hybrid electric vehicles with engine capacities up to 2,000cc. The change effectively brings these vehicles back to the standard 18 percent sales tax rate. Before the latest increase, locally manufactured HEVs had benefited from preferential rates, including 8.5 percent for certain smaller-engine hybrids and higher concessional rates for larger qualifying vehicles. Those concessions expired on June 30, 2026, after which affected hybrid vehicles were moved into a higher tax category. The resulting 25 percent sales tax had increased the tax burden on hybrid vehicles and raised concerns among industry participants about its impact on vehicle prices and demand.
The latest decision is expected to provide some relief to buyers of locally assembled hybrid vehicles, although the final impact on retail prices will depend on how manufacturers pass the tax reduction on to customers. A lower sales tax could reduce the tax component included in the price of qualifying vehicles and give automakers greater room to revise prices. However, the seven-percentage-point reduction does not automatically translate into an equivalent reduction in showroom prices because vehicle pricing also includes other duties, production costs, margins and related charges. Several locally manufactured or assembled hybrid models with engine capacities below the 2,000cc threshold could potentially benefit from the revised rate, while larger-engine hybrids and vehicles that do not meet the local manufacturing requirement remain outside the specific relief announced through the notification.
The tax adjustment comes as Pakistan continues to revise its automotive taxation framework and develop the proposed Auto Policy 2026-31. The government has been considering different tax treatments for battery electric vehicles, range-extended electric vehicles, plug-in hybrids and conventional hybrids as it works on the longer-term direction of the automotive sector. Electric vehicles have retained separate tax incentives, while the treatment of HEVs has been under review following the expiry of earlier concessions. The latest reduction therefore provides immediate relief for qualifying locally manufactured hybrids while broader discussions continue around duties, sales taxes, local manufacturing and new energy vehicles. The government has not announced a new preferential rate below 18 percent for these HEVs, making the latest change a return to the standard sales tax level rather than a restoration of the previous 8.5 percent concession.
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