ISLAMABAD: The All Pakistan Textile Mills Association (APTMA) has appealed to the Federal Board of Revenue (FBR) for intervention to rescue the local textile sector by restoring a level playing field for local inputs and ensuring timely and complete refunds.
In a letter addressed to FBR Chairman Rashid Mahmood Langrial, APTMA Secretary General Shahid Sattar urged the Chairman to review the findings of an independent study on the impact of the withdrawal of zero-rating/sales tax exemption on local supplies for export manufacturing under the Export Facilitation Scheme (EFS). The study, conducted by renowned economist Dr. Nadeem ul Haque, highlights the urgent need for policy intervention to level the playing field between local and imported inputs in export manufacturing.
The study underscores that the current policy not only threatens the viability of Pakistan’s formal textile sector but also incentivizes the informal sector, which operates outside the tax net. This has resulted in widespread closures, job losses, and reduced competitiveness, with negative consequences for other sectors, including agriculture and services.
The study estimates that the increased costs of local inputs could lead to economic losses amounting to 2% of GDP (over PKR 1.7 trillion). To mitigate these effects, the study strongly recommends restoring the EFS to its pre-Finance Act 2024 form and reinstating the zero-rating/sales tax exemption on local supplies for export manufacturing. This solution would require no adjustments, enabling business operations to resume as before.
Alternatively, the study proposes imposing an equal GST on imported inputs used in export manufacturing to create a level playing field. However, this would necessitate a comprehensive overhaul of the refund system to ensure timely and full sales tax refunds to exporters, minimizing delays and partial reimbursements.
The study further finds that misuse of the EFS regime is not widespread and could be effectively controlled through targeted adjustments. These include:
Strict Enforcement of Eligibility: Rigorous application of eligibility conditions, with harsh penalties for malfeasance.
Shortening the Audit/Reconciliation Period: Reducing the audit/reconciliation period from five years to six months, accompanied by 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 18% sales tax on local inputs, combined with delays in refund processing, has created a significant imbalance between domestic and imported inputs, adversely affecting local cotton producers and spinning units. This policy threatens the viability of the formal textile sector and incentivizes the informal sector. The resulting closures, job losses, and decreased 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. The study suggests that these adjustments could lead to economic losses equivalent to 2% of GDP (over PKR 1.7 trillion). Recent export gains may also be at risk, and the erosion of trust between industry stakeholders and tax authorities further complicates reform efforts. A comprehensive approach is needed that balances the needs of exporters, supports local industries, and ensures compliance through robust monitoring.
Impact on High-Value Producers: High-value-added producers may not be significantly affected by the GST extension on domestic products, as imports remain tax-free. However, upstream producers will face competition from GST-free imports, which are also exempt from tariffs. This shift erodes the terms of trade for upstream sectors and could place short-term pressure on exports.
EFS and Policy Inefficiencies: The EFS and broader fiscal policies impacting Pakistan’s textile industry are marked by inefficiencies that undermine sector performance. While the EFS aims to promote exports by providing duty-free access to imported inputs, its misuse, including the diversion of inputs to local markets and the inclusion of non-exporting entities, has reduced its effectiveness. Our investigation suggests that misuse is limited and could be controlled through simple system adjustments:
Strict Enforcement of Eligibility: Apply eligibility conditions rigorously, with severe penalties for violations.
Audit/Reconciliation Period: Shorten the current 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 should evolve naturally, without policy intervention. The clear solution is:
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 resolving this issue. By using algorithms to reconcile inputs and outputs and allowing instant refunds for qualified transactions, liquidity can be improved while ensuring tax compliance.
Export Trends and Policy Stability: Data shows a concerning decline in exports as a percentage of GDP. Policy instability, particularly changes in tariffs and taxes, negatively impacts exports. The Haque Tax Commission’s report stresses that tax policy stability is critical for investment and growth. Policymakers must consider the long-term consequences of volatile policies, particularly in the area of taxes.
Importance of a Realistic Exchange Rate: Econometric results show 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 action to address these critical issues,” Shahid Sattar emphasized. “The viability of Pakistan’s textile sector—and the livelihoods of millions—depends on swift and effective intervention. 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.”
