Auto Tariffs
KARACHI: The Pakistani automotive industry is facing mounting pressure and growing uncertainty as the government prepares the federal budget for the fiscal year 2025–26, with the International Monetary Fund (IMF) reportedly urging significant changes to the current tariff regime.
According to industry sources, the IMF is advocating for a rationalisation of auto tariffs and the commercial import of used cars, arguing that the existing system provides excessive protection to local assemblers and parts manufacturers at the cost of competitiveness and consumer affordability.
Currently, locally produced vehicles face over 40 percent in combined taxes and duties, leading to high prices for consumers. Industry stakeholders—particularly auto assemblers and component vendors—fear that any reduction in tariffs or an influx of used cars could destabilize the already fragile domestic industry.
On May 6, representatives of these sectors met with Haroon Akhtar Khan, Special Assistant to the Prime Minister, in Islamabad to voice their concerns. They warned that a policy shift allowing commercial imports of used vehicles or reducing Completely Built Unit (CBU) tariffs below a certain threshold could cause the collapse of the local industry.
While Akhtar reassured the industry that the government had no intention of endangering existing investments, he acknowledged that reforms were necessary. He emphasized that any adjustments would be made in consultation with industry stakeholders to ensure a balanced outcome that fosters growth while considering IMF recommendations.
The IMF has criticized Pakistan’s auto sector for being overly protective, noting that some part manufacturers operate under effective tariff protections as high as 98 percent.
For example, a part with a base value of $100 can see its cost nearly double due to combined import duties, GST, and margins, all of which are ultimately passed on to consumers. These burdens are particularly damaging in an environment where wages remain stagnant and inflation continues to bite.
The Pakistan Association of Automotive Parts and Accessories Manufacturers (Paapam) has pushed back against the IMF’s assertions, arguing that the sector contributes significantly to the national economy.
Paapam members supply auto parts worth Rs325 billion annually to the local industry, saving an estimated $480 million in foreign exchange. Additionally, the industry provides direct employment to over 150,000 people and indirectly supports around 500,000 more through Tier-2 and Tier-3 suppliers.
Nevertheless, critics, including members of the National Assembly Standing Committee on Industries, have questioned why—if the industry is so competitive—it has failed to establish a significant export footprint. While over 40 Paapam members currently export parts to regions such as Europe, Africa, the United States, and China, these exports remain relatively small in volume.
As part of its proposed reforms, the government is considering a phased reduction in tariffs—between 5 and 15 percent—along with cuts to additional customs and regulatory duties.
The highest tariff reductions may target higher engine-size CBUs. While some within the industry argue that their pricing models already offer foreign exchange savings by working below landed costs, others believe that true competitiveness should be judged based on Free on Board (FOB) pricing rather than tariff protections.
Despite the pushback from entrenched industry players, some auto assemblers acknowledge that tariff rationalisation and increased competition could ultimately benefit consumers by reducing vehicle prices and stimulating the currently sluggish demand in the auto sector.
The coming months will be crucial as the government balances economic reform commitments to the IMF with the protection of local industrial interests.
