Just a week ago, Finance Minister Muhammad Aurangzeb presented the federal budget for 2025–26 to the National Assembly, proposing a series of tax increases, including a hike in sales tax on small vehicles. The proposal suggested raising the sales tax on cars with engine capacities as low as 850cc and increasing the tax on hybrid vehicles up to 1800cc from the existing 12.5% to 18%.
Government Withdraws Tax Hike on Small Cars and Hybrids
In a recent development, the government has decided to withdraw the controversial tax hike on small and hybrid vehicles. The proposal had faced strong criticism for being regressive and environmentally unfriendly, particularly in the case of hybrids.
Criticism Over Tax on 850cc Vehicles
The Senate Standing Committee on Finance and Revenue, chaired by Senator Saleem Mandviwalla, reviewed the Finance Bill 2025 in a series of sessions and voiced significant concerns regarding the increase in GST on small vehicles. Mandviwalla labeled the proposed 18% tax on a Rs. 3 million car as “unfair.” Other members of the committee agreed, suggesting that a more reasonable rate—such as 14% or 15%—should be considered.
Senator Shibli Faraz also highlighted inconsistencies in the budget, noting that while some regions were granted tax relief, small car buyers were being burdened. The widespread disapproval ultimately led the government to withdraw the proposal.
Hybrid Vehicle Tax to Remain Unchanged
Along with small cars, the sales tax on hybrid vehicles will also remain at the current 12.5%, rather than increasing to 18% as originally proposed. This reversal is estimated to cost the government around Rs. 7 billion in potential revenue. However, it aligns with the current auto policy, which prevents any tax hike on hybrid cars before June 2026.
Balancing Revenue and Public Interest
While the government initially introduced these tax hikes to generate additional revenue, the Senate’s opposition highlights the delicate balance between fiscal policy and public sentiment. For now, car owners—especially those looking to buy smaller or hybrid vehicles—can breathe a sigh of relief.
