Confusion in auto sector

EDITORIAL: The auto policy is in limbo. The Auto Industry Development and Export Policy (AIDEP 2021–26) expired on June 30, and the new policy, which was supposed to come into effect on July 1, 2026, has fallen casualty to infighting among various ministries and departments.

The outcome is utter confusion. Players across the value chain are clueless, while consumers have slowed down their purchases. The momentum that the auto sector gained last year, with total four-wheeler sales approaching the 300,000 mark for the first time since 2022, is losing steam.

Reportedly, differences between the ministries of commerce and industries over the tariff structure remain unresolved. The issues surfaced a year ago when the National Tariff Policy (2025–30) was presented alongside the FY26 budget. Reductions in tariffs related to the auto industry were delayed for one year to be incorporated into the proposed new auto policy alongside the FY27 budget. However, after a year of deliberations and meetings, the matter remained unresolved, while the budget was passed in the meantime. Back-to-back meetings have taken place over the past week or so. The authorities are still seeking advice from economists and industry experts. Policymakers are moving in circles, which shows how disjointed and fragmented the government is.

One can sense that officials in the Ministry of Commerce are doing more in terms of tariff rationalisation and the harmonisation of sales tax than what was demanded by the IMF. Some say that lobbies are active and are trying to secure outcomes that suit them. Local assemblers are fighting for greater protection for the types of vehicles in their portfolios. Auto parts manufacturers want localisation to increase and want the policy to revolve around it. Meanwhile, importers want the used-car market to be opened up. If the new auto policy is delayed by another year—which appears increasingly likely—we can expect a windfall for used-car importers and dealers, but also spell trouble for those who have built, or are building, assembly lines catering to New Energy Vehicles (NEVs).

The GST concessions given to HEVs and PHEVs expired on June 30, and without a new policy, these vehicles are taxed at the same rate as comparable ICE cars. This means that GST on them has increased from 8–12 percent to 25 percent, even higher than the standard tax rate of 18 percent. Meanwhile, concessions given to EVs in the affordable segment have been extended for another year. Another development in the budget was the reduction in tariffs on CBUs, in line with the NTP, while a proportional reduction in tariffs on CKDs, which was supposed to be part of the new auto policy, remains pending. This has given jitters to several auto assemblers, especially those with hybrid cars in their portfolios.

The grapevine suggests that the status quo will continue in FY27 and that everyone will have to live with the default position following the expiration of concessions and changes in CBU tariffs. The government may return to supporting localisation and NEVs next year but, by then, the damage may already have been done. There is a good chance that the market will be flooded with exotic CBUs after October, while sales of PHEVs and HEVs may decline drastically. OEMs may replace them with ICE options, and the growing share of NEVs may fall. Although EVs and REEVs may continue to enjoy concessions for another year, their future remains uncertain.

Proponents of ending protection for the local industry argue that if companies have failed to localise and gain scale over several decades, how will they do so in the coming years? However, they should push the government to lower taxes, as roughly half of the price of any car comprises government taxes. This is one of the main reasons the market has failed to reach the stated objective of 500,000 units. In any case, the bottom line is that this will not bode well for assemblers, especially those that entered the market after 2016 and have collectively committed more than $1 billion in capital investment while building the value chain. Vendors are also likely to suffer. Consumers may have a flurry of options in the short run but could suffer if importers and dealers do not build the necessary after-sales service infrastructure. The dithering by the government does not augur well for the industry or the consumers.

Copyright Business Recorder, 2026