The government is preparing a major overhaul of auto taxation in Budget 2026–27, including a proposed carbon levy on large-engine vehicles and new incentives to accelerate electric vehicle adoption in Pakistan.

Under the draft proposals, vehicles with engine capacities above 2,000cc may face a carbon levy ranging from 10% to 19.5% as part of efforts to discourage fuel-intensive transport and support climate and energy transition goals. Officials say the measure is designed to shift consumer demand away from petrol and diesel vehicles.

In parallel, the government is planning phased increases in tariffs on imported conventional vehicles to gradually raise their cost and further encourage a move toward cleaner alternatives.

At the same time, policymakers are finalizing a strong incentive package for locally manufactured electric vehicles. Proposed measures include reducing customs duties on EV batteries, electric motors, and related components to around 1%, along with a similar 1% sales tax on EV parts. Additional relief such as exemptions from federal excise duty, capital value tax, and withholding tax is also under consideration to reduce overall EV prices and attract investment.

However, hybrid vehicles are not expected to receive comparable tax concessions, as the policy focus appears to be shifting toward full electric mobility rather than transitional technologies.

A high-level committee headed by Deputy Prime Minister Ishaq Dar is reviewing the proposals, which are also projected to generate revenue of over Rs. 142 crore over five years.