APTMA speaks about challenges facing industry

ISLAMABAD: All Pakistan Textile Mills Association (APTMA) has sought government’s nod for direct import of LNG and procurement of 35 percent new domestic gas discoveries through competitive bidding under 3rd party access.

In a presentation to the Finance and Revenue Minister Senator Muhammad Aurangzeb, a team of APTMA led by its chairman, the association briefed that textile exports recovered by 8.6 percent in 2024, reaching $17.45 billion in 2024 from $16.07 billion in 2023, approaching pre-crisis $18.67 billion in 2022.

However, there has been rapid increase in import of inputs (cotton, yarn, cloth) as local sales have plummeted due to sales tax disparity between local and imported supplies for exports, leading to erosion of net foreign exchange earnings.

Local raw materials: APTMA says seeking a level playing field

The APTMA asked the finance minister to eliminate dual taxation by removing the one per cent advance tax on export proceeds, ensuring exporters are taxed only under the normal, predictable regime and immediately clear all outstanding dues of industry

Export Facilitation Scheme (EFS): Finance Act 2024 withdrew the zero-rating/sales tax exemption on local supplies under the EFS, while imports continue to be duty-free and sales tax-free.

Domestically produced raw material and inputs for exports subject to 18 per cent sales tax that is refundable, making it a non-revenue measure. Exporters face refund delays of over six months and partial refunds of up to 70 per cent, while remainder is indefinitely deferred for manual processing with no progress in the last 4-5 years.

Additional administrative and time cost of 6-10 months (from sourcing of inputs to filing of refund after export) associated with procurement of locally produced inputs. Strong incentive for exporters to substitute local inputs with imports.

Monthly imports of yarn increased from 8 million KG in January 2024 to 32 million KG in January 2024. Greige cotton cloth imports up from two million KG to five million KG during the same period. Yarn imports are expected to triple from around 107 million KG in FY24 to 300 million KG ($900 mil.) in FY25.

The APTMA was of the view that had the sales tax disparity not disadvantaged domestic industry, the textile sector’s net foreign exchange earnings would have been $1.5-2 billion higher?

However, over 100 spinning mills (40 per cent of production capacity) have shut down with others operating at below 50 per cent capacity, on the verge of closure. Hundreds of thousands have been unemployed, and millions of livelihoods lost.

The spinning sector, with 12 million spindles, can consume over 16 million bales of cotton/annum; decline in spinning threatens broader cotton economy of Pakistan that contributes $2-3 billion/year to rural incomes. De-industrialisation of the spinning sector will sink investment of over $15 billion (including through TERF).

Weaving faces similar situation; will spillover further downstream very shortly. Overall economic losses from the decline of domestic spinning and cotton production would be huge given multiplier effect of 6-7 times on domestic economic activity.

Negative impact on government revenues with declines in tax collection from businesses, wages and commerce. Several countries worldwide maintain zero-rated regimes whereby inputs for export manufacturing are exempt from sales tax.

The APTMA has proposed the government to create a level playing field for locally produced raw material and inputs vis-a-vis imports, requesting for restoration of EFS to its June 2024 form, reinstating zero-rating on local supplies for exports or subject EFS imports to the same sales tax regime.

The association has requested the government to adopt graduated sales tax regime (like India), where inputs are taxed at lower rates than final goods to enhance compliance, reduce tax evasion, and improve manufacturing competitiveness.

Cost of energy is a major factor behind competitiveness of yarn, cloth and overall textile/manufacturing exports. Energy is 35-55 per cent of conversion costs in upstream segments in Pakistan, compared to less than 20 per cent in competing economies. Industry requires 9 cents/kWh electricity and $9/MMBtu gas to be internationally competitive.

Industrial power tariffs in Pakistan are 12-14 cents/kWh, significantly higher than competing economies (5-9 cents/kWh), rendering production costs uncompetitive. High tariffs result from cross subsidies, excessive T&D losses, and administrative/operational inefficiencies of DISCOs. Despite reduction in FY25, industrial power consumers are still subject to Rs 100 billion cross subsidies to other sectors.

Gas price for captive consumers has increased from Rs1,100/MMBtu to Rs3,500/MMBtu over the last two years, rendering gas-fired captive power generation more expensive than grid at over 14 cents/kWh. As such, no justification/rationale for additional “grid transition levy” of 5-20 per cent.

Only reason industries still running gas-fired captive is due to benefits of hot water/steam cogeneration, and to avoid pitfalls of low-quality grid supply. Many have switched to furnace oil or coal fired captive generation, integrated with solar systems. Compared to gas this comes at a cost disadvantage and leads to higher carbon emissions that are incompatible with international environmental regulations like the EU CBAM and net-zero targets.

The APTMA has demanded the government to liberalize the market through the following measures: (i) allow procurement of 35 per cent new domestic gas discoveries through competitive bidding under 3rd party access;(ii) permit exporters to directly import LNG.

APTMA can import and transport its own LNG through 3rd party access at ex-delivery price of $9/MMBtu; (iii) neither should be subject to any form of levy, taxes, cross subsidies or other domestic inefficiencies like excessive unaccounted for gas rates;(iv) in the meantime, supply RLNG at full cost without cross subsidies and other extraneous costs (excessive UFG, etc).

Electricity: APTMA has asked the government to reduce industrial power tariff to 9 cents/kWh for all electricity supplied and remove Rs100 billion cross subsidy from industrial power tariffs. Power tariff must be < 9 cents/kWh; incremental tariff of 8-9 cents/kWh will not lead to industrial recovery, or growth in exports or power consumption since industry is currently at ~60 per cent of historical consumption and realizing incremental gains requires increasing to 100 per cent and beyond that is neither feasible nor foreseeable.

The APTMA has also sought permission of B2B power contracts with reasonable wheeling charge: (i) finalise wheeling charge at Rs5/kWh cost-of-service, excluding legacy costs of the grid unrelated to B2B consumers;(ii) enabling textile sector to source clean, competitively priced electricity through B2B contracts is essential considering net-zero commitments and evolving environmental regulations like EU CBAM.

Copyright Business Recorder, 2025