In a recent development, the Federal Board of Revenue (FBR) has declined a proposal put forth by the Ministry of Industries, prompting to reduce general sales tax (GST) to 18% on locally assembled cars, currently clocking at 25%.

The proposal, discussed in a meeting of the Economic Coordination Committee (ECC), sought to rationalize tax criteria for locally manufactured and assembled vehicles.

FBR’s Response

The Industries and Production Division proposed applying an 18% sales tax uniformly across all local auto manufacturers and assemblers. However, the FBR expressed concerns regarding potential revenue loss and a shrinking tax base. The proposal, if implemented, would lead to certain vehicles, particularly SUVs, currently taxed at 25%, benefiting from a reduced tax rate, thus exacerbating fiscal challenges.

The Industries and Production proposed applying on 18% sales tax uniformly across all local auto manufacturers and assemblers. However, FBR raised the concerns translating that the move will not only result revenue loss and but also shrink tax base.

The FBR cited its commitment under the international Monetary Fund (IMF) standby arrangement, emphasizing the necessity of adhering to fiscal measures. In line with this commitment, the tax sales on luxury goods, previously at 17% was increased to 25% ad valorem in March 2023. This adjustment also encompassed locally manufactured and assembled double-cabin vehicles and SUVs/CUVs, regardless of engine capacity.

Impact on Tax Base and Revenue

The rejection of the proposed 18% GST underscores the government’s stance on maintaining fiscal stability amid economic challenges. By avoiding a reduction in tax rates for certain vehicles categories, the government aims to safeguard revenue streams necessary for economic stabilization efforts.

The FBR decision to reject the proposed 18% GST on locally manufactured cars reflects its commitment to discal prudence and revenue generation. While the Minister of Industries sought uniformity in tax application, the FBR prioritizes sustaining tax revenues essential for addressing fiscal and economic imperatives.