ISLAMABAD: All Pakistan Textile Mills Association (APTMA) has sought intervention of Federal Board of Revenue (FBR) to rescue textile industry by restoring a level playing field for local inputs, ensuring timely and full refunds.
In a letter to Chairman, FBR, Rashid Mahmood Langrial, Secretary General, APTMA, Shahid Sattar, has asked him to view the finding of an independent study on impact of withdrawal of zero-rating/sales tax exemption on local supplies for export manufacturing under the Export Facilitation Scheme (EFS), conducted by Chairman PIDE Dr Nadeemul Haque.
The study underscores the urgent need for policy intervention to restore a level playing field for local inputs in export manufacturing, in comparison to imported inputs. Such action is crucial to safeguarding Pakistan’s textile sector and its significant contributions to the national economy.
APTMA, minister discuss issues facing textile industry
The study emphasizes that the current policy not only threatens the viability of the formal textile sector but also incentivizes the informal sector, which operates outside the tax net. This has led to widespread closures, job losses, and a decline in competitiveness, with ripple effects across other sectors, including agriculture and services.
The study estimates that the increased costs of local inputs could result in economic losses equivalent to 2 percent of GDP (over PKR 1.7 trillion).
To address these issues, it strongly recommends restoring the EFS to its pre-Finance Act 2024 form, reinstituting the zero-rating/sales tax exemption on local supplies for export manufacturing. This solution, considered the most effective, would require no adjustments, allowing business operations to continue as before.
Alternatively, the study suggests creating a level playing field by imposing an equal GST on imported inputs used in export manufacturing. However, this would require a comprehensive overhaul of the refund system to ensure timely and complete sales tax refunds to exporters, minimizing delays and partial reimbursements.
The study further reveals that misuse of the EFS regime is not widespread and could be controlled through targeted adjustments. These include enforcing eligibility conditions rigorously, imposing strict penalties for malfeasance, and reducing the audit/reconciliation period from five years to six months, with robust online monitoring and algorithmic checks on transactions and exports.
The full recommendations of the study are as follows:
Imposition of GST on Local Inputs: The imposition of an 18% sales tax on local inputs, combined with persistent delays in refund processing, has created a significant imbalance between domestic and imported inputs, negatively affecting local cotton producers and spinning units. This policy threatens the formal textile sector’s viability while incentivizing the informal sector.
The resulting closures, job losses, and decline in competitiveness have broader implications for Pakistan’s economy, including agriculture and services.
Costly Adjustments to the Local Value Chain: The imposition of GST on domestic inputs will force costly adjustments within the local value chain. Our findings suggest that these adjustments could result in an economic loss equivalent to two percent of GDP (over PKR 1.7 trillion).
The recent export gains may be at risk, and the erosion of trust between industry stakeholders and tax authorities further complicates reform efforts. A holistic approach is needed that balances exporters’ needs, supports local industries, and ensures compliance through robust monitoring.
Impact on High-Value Producers: High-value-added producers will likely remain unaffected by the GST extension on domestic products, as imports remain tax-free. However, upstream producers will face competition from GST-free imports that are not subject to tariffs. This shift erodes the terms of trade for upstream sectors, potentially leading to short-term pressure on exports.
EFS and Policy Inefficiencies: The EFS and related fiscal policies affecting Pakistan’s textile industry are characterized by inefficiencies that undermine sector performance. While the EFS aims to promote exports by enabling duty-free access to imported inputs, its misuse, including diversion of inputs to the local market and inclusion of non-exporting entities, has diminished its effectiveness. Our investigation suggests that misuse is not excessive and could be controlled through simple system adjustments.
Strict Enforcement of Eligibility: Ensure rigorous application of eligibility conditions and harsh penalties for malfeasance.
Shortening Audit/Reconcilia-tion Period: Reduce the five-year audit/reconciliation period to six months, with enhanced online monitoring and algorithmic checks on transactions.
Policy Intervention in the Value Chain: Economic theory suggests that the value chain must evolve naturally, without policy intervention. The solution is clear.
Withdraw GST on Local Inputs: This would be the ideal solution, as it requires no adjustments and would allow business operations to continue as before.
Impose GST on Imports: From a GST perspective, imposing GST on both local and imported inputs would neutralize the tax’s impact. However, this would require fixing the refund system, which has been a longstanding issue. Delays and incomplete refunds create cash flow problems for producers and need urgent attention.
Delays and Incomplete Refunds: Producers continue to face delays and incomplete refunds. To maintain the credibility and efficiency of the GST system, urgent action is needed to ensure timely and full refunds. International examples and FBR consultants suggest that digitization is key to addressing this issue. Using algorithms to reconcile inputs and outputs, and allowing instant refunds for select transactions, would improve liquidity while ensuring tax compliance.
Export Trends and Policy Stability: Data shows a concerning decline in exports as a percentage of GDP. Policy instability, especially changes in tariffs and taxes, negatively impacts exports. The Haque Tax Commission’s report also emphasizes that stable tax policies are crucial for investment and growth. Policymakers must consider the long-term consequences of volatile policies, especially concerning taxes.
Importance of a Realistic Exchange Rate: Econometric results indicate that maintaining a realistic exchange rate is vital for export growth. A stable and competitive exchange rate significantly impacts export performance.
Low Tariffs and Global Integration: Low tariffs and trade openness can help integrate Pakistan’s value chain into the global value chain, benefiting exporters and local industries.
“We urge you to carefully review the findings and take immediate steps to address the critical issues outlined. The viability of Pakistan’s textile sector — and the livelihoods of millions — depends on swift and effective action. Restoring a level playing field for local inputs, ensuring timely and full refunds, and implementing the recommended reforms are essential to preventing further damage to the sector,” Sattar added.
Copyright Business Recorder, 2025
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