Pakistan's automotive sector is facing a perfect storm of policy paralysis, fiscal contradictions, and competitive pressures that threaten to unravel decades of industrial investment. At the center of this crisis is the federal government's failure to finalize the Auto Sector Development Policy 2026–31, leaving manufacturers, suppliers, and investors in a state of limbo. The stakes are enormous: billions of dollars in capital, over 1,300 parts manufacturers, and the country's industrial future hang in the balance. Main Developments On Thursday, the committee led by Power Minister Sardar Awais Leghari revisited the unresolved issues surrounding the Auto Sector Development Policy 2026–31. The industry has been vocal about its grievances, particularly the impact of Completely Built Unit (CBU) imports on local manufacturers and the delayed notification of sales tax reductions. Production lines have reportedly ground to a halt at some facilities, placing billions of rupees of investment at risk. The industry has formally written to the Prime Minister, warning that the proposed tariff cuts under the National Tariff Policy 2026–31 could trigger deindustrialisation, leading to permanent closures and the loss of more than USD 5 billion in industrial investment. Read also: What a USD100bn tariff refund reveals about Trump's trade limits A critical anomaly has emerged: following the reduction in customs duty on CBUs in the 2026–27 budget, the duty on Completely Knocked Down (CKD) kits is now higher than that on finished vehicles. This inversion discourages local assembly, as importing fully built cars becomes cheaper than manufacturing them domestically. Meanwhile, CKD imports continue under the outdated SRO 655(I)/2006, with no new tariff announced. The industry has also raised concerns over reported tax relief for luxury vehicles priced above Rs 10 million, questioning the timing and policy priorities. Finance Bill 2026 had increased sales tax on hybrids and plug-in hybrids to 25 percent to strengthen revenues, but the government is now considering reversing that decision—a move that contradicts the IMF's push for a broader tax base and fiscal discipline. Background The auto industry's current predicament is rooted in years of policy drift. The Auto and Auto Parts Policy has been under discussion for months, with dozens of sessions held with the Ministry of Industries and Production (MoI&P). However, public sector stakeholders have failed to reach a consensus, as they remain unwilling to revise their previous positions. Pakistan's automotive sector, which includes approximately 1,324 parts manufacturers, has historically relied on protective tariffs to encourage local assembly and parts production. The proposed CBU tariff reductions under the National Tariff Policy 2026–31 represent a fundamental shift in this approach, exposing the industry to international competition it is not prepared for. Why It Matters The non-finalisation of the policy is not just an administrative delay—it is causing real economic damage. Production halts have already begun, and the risk of permanent plant closures threatens to wipe out billions of dollars in investment and hundreds of thousands of jobs. Yousuf M. Farooq, Director Research at Chase Securities, highlighted the policy contradiction: while Pakistan implements tough economic reforms under its IMF programme, the government is reportedly considering reducing sales tax on hybrids and PHEVs from 25 percent to 18 percent. These vehicles are mostly priced at Rs 10 million and above, placing them beyond the reach of most Pakistanis, which raises questions about whether limited fiscal space is being used wisely. For the industry, the message is clear: without policy clarity and equitable tariff structures, the sector's future is bleak. The warning of deindustrialisation is not hyperbole—it is a realistic outcome if the current trajectory continues. What's Next The Leghari committee is expected to continue deliberations, but the clock is ticking. The industry has demanded an appropriate reduction in duty rates on CKD parts, a rollback of the sales tax increase on PHEVs, and the earliest possible finalisation of the Auto and Auto Parts Policy. Whether the government will heed these calls or proceed with the proposed tariff reductions remains an open question. The outcome will determine whether Pakistan's automotive industry survives as a manufacturing hub or becomes a mere import market for foreign vehicles.