EFS designed in 2021 to simplify and streamline export operations by consolidating earlier schemes such as SRO 450, 492, 327, and DTRE
The federal budget for FY 2025–26 was anticipated to serve as a roadmap for revitalizing Pakistan’s manufacturing, trade, and export sectors. Instead, it has drawn sharp criticism from industry stakeholders for its lack of strategic direction, absence of structural reforms, and measures that threaten the viability of key economic sectors, particularly textile exports. While expectations were set for a budget that would rein in inflation, stimulate investment, and bridge the formal-informal sector divide to enhance tax revenue, the proposals unveiled have failed to meet these goals. The budget neither offers a coherent economic vision nor demonstrates the capacity to address Pakistan’s structural challenges.
Pakistan’s textile export industry—constituting the backbone of the country’s exports—has been dealt a severe blow through the imposition of 18% sales tax on imported yarn under the Export Facilitation Scheme (EFS). This move, at a time when the sector is already grappling with liquidity shortages and delayed sales tax refunds, threatens to cripple exporters by disrupting cash flows and undermining their global competitiveness. The EFS was designed in 2021 to simplify and streamline export operations by consolidating earlier schemes such as SRO 450, 492, 327, and DTRE. Through integration with WeBOC and Pakistan Single Window (PSW), the scheme allowed duty and tax-free import of inputs for re-export—critical for sustaining the value-added textile chain. The newly proposed taxation dismantles this progress, contradicting the very spirit of EFS. Despite being refundable, sales tax operates as a consumption tax and exporters often face refund delays of up to 180-200 days. This delay imposes severe stress on working capital, especially for SMEs. Introducing a new tax burden at the import stage essentially punishes exporters for participating in the formal economy.
Imposing taxes on imported yarn contradicts the global trend of facilitating raw material access for re-export. Regional competitors like Bangladesh, Vietnam, and Cambodia operate under duty and tax-free regimes for such imports, giving them a distinct competitive edge. Pakistan’s cotton quality issues, including declining staple length and contamination, necessitate import of better-quality yarn, especially as global demand shifts towards synthetic fibers—now 79% of the global textile market.
Statistics reveal the impact of cost dynamics. While yarn imports from China on a tax-paid basis have surged 300%, imports under EFS have increased only 85%, indicating that buyers are motivated by quality and price, not by tax arbitrage. The new tax regime would limit Pakistan’s exporters to low-value products, derailing aspirations for moving up the value chain. A parallel concern is the prevalence of undocumented, cash-based yarn transactions—commonly referred to as “GOL trade”—which undermines fair market practices and formal export channels. Each year, approximately 2.5 to 3 million bales of cotton are traded through these undocumented mechanisms, weakening compliance and diminishing the effectiveness of facilitation schemes like EFS. Urgent policy intervention is needed to curb this practice, enforce proper invoicing, and ensure transparency in domestic trade.
A particularly controversial provision in the Finance Bill is the insertion of Section 37AA in the Sales Tax Act, empowering Inland Revenue Officers to arrest individuals on mere suspicion of tax fraud without a warrant. This violates Article 10-A of the Constitution, which guarantees due process and a fair trial. By granting unchecked powers to tax officials, the measure risks misuse, deterring legitimate business activity and damaging investor confidence. Tax enforcement should remain within the bounds of civil law, with any allegations of fraud subjected to judicial scrutiny. Criminal liability must not be arbitrarily assigned by administrative authorities.
Exporters have also been unfairly targeted under the income tax regime. The simultaneous application of Section 154 and the newly inserted Subsection (6C) in Section 147 imposes double taxation on export proceeds. While banks now collect 1% advance tax under Section 154 (declared as minimum tax), an additional 1% advance tax is imposed under Section 147—together pushing the effective rate to an unjust 2%. For context, local suppliers pay 1%, and yarn traders only 0.5%.
This discriminatory treatment not only violates the principle of tax equity but also increases the cost of doing business for exporters. Coupled with an additional Super Tax of up to 10%, the current framework is unsustainable. There is a dire need to restore the Final Tax Regime (FTR), abolish Super Tax for exporters, and rationalize advance tax to support export competitiveness.
Achieving the projected 18.5% increase in tax revenues for FY 2025–26 is unrealistic without expanding the tax base. With GDP growth stagnant and inflation easing, relying on existing taxpayers alone will not yield desired results. Instead of squeezing compliant sectors, the government must broaden the tax net, improve public expenditure efficiency, and phase out distortive subsidies.
Key areas for reform include: 1) Tax base expansion: Incentivize formalization and penalize undocumented trade, 2) energy sector viability: Rationalize tariffs and reduce circular debt, 3) privatization, governance and revitalizing state-owned enterprises through private sector participation, and 4) public debt management — build institutional capacity for debt sustainability and develop a domestic debt market.
Even in low-tax countries like Bangladesh and Pakistan, tax gaps are considerable when measured as a share of existing revenues. Therefore, fiscal reforms must be part of a broader development strategy, not a standalone effort.
The 2025–26 budget presents a troubling narrative - instead of facilitating economic recovery, it imposes regressive measures that stifle investment and threaten exports. It risks derailing Pakistan’s most vital industrial sector, textiles, and undermines business confidence through arbitrary enforcement powers and a burdensome tax regime. The time for comprehensive, transparent, and equitable reform is now. Without it, Pakistan’s aspirations for sustainable economic growth and global competitiveness will remain unfulfilled.