The federal government has exempted locally manufactured hybrid electric vehicles (HEVs) with engine capacities of up to 2,000cc from sales tax, providing clarity to a segment that has faced uncertainty over the tax regime.

The Ministry of Finance amended sales tax rules and issued a notification covering locally produced HEVs up to 2,000cc, with immediate effect. The decision has received a cautious welcome from the auto parts industry, which supports the relief but is urging a broader industrial policy to protect local manufacturing and support the shift to electric vehicles.

Aamir Allawala, former chairman of the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM), said the move provides clarity for the hybrid segment.

However, he warned of long-term risks to the auto parts industry from the National Tariff Policy and proposed auto policy.

He said policy must prioritise jobs, protect industrial infrastructure producing around 50% of vehicle parts by value, and support EV transition without undermining local production. Allawala said PAAPAM has proposed a minimum 35% customs duty or Federal Excise Duty on localised parts.

He warned that without tariff protection, the auto parts sector could roll back or shut within three years, shifting Pakistan towards assembly or imports instead of manufacturing.

He estimated this could cost around 250,000 jobs and require about $2 billion annually in vehicle imports.

He also called for equal 35% tariff protection for conventional and electric vehicles.

Auto industry expert Mashood Ali Khan supported reviewing firms under the previous auto policy to assess localisation levels. He said new entrants should start at 10% localisation, rising to 40% within five years.

PAAPAM warned this would avoid a repeat of post-2016 trends, when entrants imported 80–100% CKD kits while benefiting from a 25% duty regime.