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The federal government has decided to revisit a proposal to increase the sales tax on smaller, locally assembled cars. Reports indicate a possible imposition of taxes on vehicles with engine capacities of up to 850cc.

These claims come despite Islamabad scrapping the idea just last week. According to a report, insiders familiar with the ongoing budget planning have stated that the earlier decision to hold off on the tax hike has been overturned and that the revised rates are being prepared for inclusion in this year’s Finance Bill. 

If passed, the new rates on the aforementioned vehicle type could fall anywhere between 15 and 18 percent. This marks a steep increase from the current sales tax rate these vehicles are subjected to, a relatively conservative 10 to 12.5 percent.

Reports suggest that lawmakers need to boost revenue levels during fiscal year (FY) 2025-26. With the budget for FY 2025–26 looming, officials are under mounting pressure to find new cash flows. The International Monetary Fund (IMF) wants Islamabad to increase revenues, as it has asked the federal government to incorporate agricultural income tax into provincial budgets, along with the expectation that provincial governments will observe austerity measures.

Raising taxes on small cars has remained unpopular, as it erodes the purchasing power of households that aren’t wealthy. Details for reports highlight that historically, small engine vehicles have been subjected to lower tax rates, keeping them within reach for working-class and middle-income households.

This spells bad news for domestic automobile assemblers as well, as a spike in taxes is likely to translate into higher car prices, which could reduce sales volumes. Sales volumes only recovered as inflation rates normalised in the outgoing FY, coupled with the State Bank of Pakistan (SBP) cutting interest rates to a conservative 11 percent. However, sales may tank upon the implementation of a tax hike.

If approved, the higher sales tax on small cars may lock a large segment of potential buyers out of the market for cars. Higher costs might potentially even cause some buyers to abandon purchasing a car altogether if prices rise significantly.

However, it merits a mention that a formal announcement is yet to be made. Buyers may scramble to place purchase orders before the announcement of the budget to avoid bearing higher sales tax rate.

The Speaker of the National Assembly (NA), Ayaz Sadiq, has approved the federal budget schedule, confirming that the budget’s presentation will take place on Tuesday, June 10. According to details shared by the NA Secretariat, the assembly will not meet on June 11 or 12, giving lawmakers time to go through the proposed budget.

Reports reveal that Khurram Schehzad, adviser to the finance minister, announced that the Pakistan Economic Survey will come out on Monday, June 9. Following the release of the survey, a full debate on the budget will start in the NA from June 13. Reports indicate that parties represented in the assembly will be allotted time according to the rules to present their viewpoints and concerns during the discussion.

According to the NA Secretariat’s statement issued on Sunday, the debate will continue until June 21, with no session on June 22, and will reconvene on June 23 to review the necessary expenditures for the fiscal year 2025–26. Reports suggest that votes and debates on proposed cuts and grants will be held on June 24 and 25.

The Finance Bill will reportedly reach its final stage on June 26, with discussions and a vote. The assembly will then move on to other matters, on June 27, going over matters including “supplementary grants”. Any alterations to this timetable, however, will only be allowed if permitted by the speaker himself.

Prime Minister Shehbaz Sharif has stated that his administration’s main objective in the budget is to offer relief to ordinary citizens. Alongside that, job opportunities, agricultural growth, housing, support for small and medium enterprises, and advancement in IT have been outlined as high-priority areas.

In similar budget-related developments, Planning Minister Ahsan Iqbal recently highlighted that the development budget would be around Rs1 trillion. He also gave a clear indication that the government may raise defence spending in the upcoming financial year.

Analysts will watch the budget sessions closely, as decisions made in the coming weeks will shape the macroeconomic landscape in the country. Latest data from the IMF suggests that government expenditure accounted for approximately 19.24 percent of GDP. If the federal government decides to boost expenditures in the upcoming budget, Pakistan’s GDP value will rise.