The Federal Board of Revenue (FBR) has declined a proposal from the Ministry of Industries to impose an 18% General Sales Tax (GST) on locally manufactured cars. The proposal aimed to apply a uniform sales tax rate across all vehicles, but the FBR raised concerns about potential revenue loss and a decline in tax collection.
The Ministry of Industries submitted its input during a recent Economic Coordination Committee (ECC) meeting, suggesting a 18% sales tax for all local auto manufacturers and assemblers, with an exception for cars below a 1,400cc engine capacity.
However, the FBR expressed disagreement, highlighting the possibility of allowing sports utility vehicles (SUVs) and other vehicles, currently subject to a 25% sales tax, to benefit from a reduced rate of 18%. Such a move, the FBR cautioned, could lead to a contraction of the tax base and revenue losses.
The FBR pointed out its commitment under the International Monetary Fund (IMF) standby arrangement and emphasised the need to allocate resources for economic stabilization amid fiscal and current account challenges. In March 2023, the sales tax on luxury goods, initially at the standard rate of 17%, was increased to 25% ad valorem. This adjustment also applied to locally manufactured and assembled double-cabin vehicles.
The FBR noted that the 25% sales tax on SUVs/CUVs created a market imbalance, making smaller vehicles uncompetitive. To address this, a proposal was sent to the Cabinet Committee on Legislative Changes (CCLC) in August 2023, suggesting that all locally manufactured vehicles with a price exceeding Rs5 million (excluding sales tax) should pay a 25% sales tax.
Following the CCLC’s decision and subsequent federal cabinet ratification, a reconsideration was proposed, suggesting the retention of the 1,400cc engine capacity condition to safeguard the tax base. It was further proposed to apply a price benchmark of Rs4 million (excluding sales tax) for vehicles below 1,400cc to attract the standard tax rate of 18%.
Locally manufactured and assembled vehicles below 850cc would continue to pay a reduced tax rate of 12.5%, while hybrid electric vehicles would benefit from reduced tax rates as per the Eighth Schedule of the Sales Tax Act 1990. The estimated annual revenue impact of this proposal is Rs4.5 billion.
The FBR’s rejection of the 18% sales tax proposal underscores the complexities in balancing tax policies for the automotive industry while ensuring revenue stability. The matter is expected to undergo further scrutiny, aligning with the government’s commitment to responsible fiscal management.
