APTMA demands immediate action on misuse of export facilitation scheme

KARACHI: The All Pakistan Textile Mills Association (APTMA) Southern Region has highlighted the severe losses and unemployment caused by the misuse of the export facilitation scheme (EFS), which exempts sales tax and duties on the import of cotton and blended yarns.

According to Chairman of APTMA South Zone Naveed Ahmad, this misuse has led to a significant increase in yarn imports under the pretext of being used in the export of textile products. However, much of this yarn is being sold in the domestic market, resulting in losses for local yarn manufacturers and the closure of many industries. This, in turn, has led to the loss of jobs and livelihoods for hundreds of thousands of textile workers.

“While we appreciate genuine exporters, unscrupulous elements are misusing this scheme to evade sales tax and customs duties, leading to the loss of millions of rupees in government revenues and crippling the domestic industry,” he stated.

The APTMA has raised the issue at all levels of government, calling for an immediate review of the scheme to create a level playing field. Unfortunately, their pleas have been ignored, and the domestic industry continues to suffer. Ahmad noted that the withdrawal of zero-rating on local supplies for export manufacturing under the Finance Act 2024 was intended as a revenue-enhancing measure but has instead had the opposite effect, leading to a decline in business activity and reduced government revenue collection.

The textile industry, particularly the spinning sector, is facing severe challenges due to high energy prices. Local manufacturers who previously supplied exporters are now rapidly shutting down, as exporters are purchasing duty-free and sales tax-free inputs from abroad rather than from domestically manufactured yarn, which is subject to an 18 per cent sales tax. While sales tax is refundable in principle, the Federal Board of Revenue (FBR) continues to delay refunds, incurring an opportunity cost of at least 20 per cent annually.

Ahmad also highlighted that imports of yarn and other inputs under the EFS are increasingly flooding the domestic market illegally. This duty-, sales tax-free yarn is being sold at prices that local industries cannot compete with, primarily due to higher production costs exacerbated by flawed policymaking that has led to soaring energy prices and a decline in domestic cotton production.

“Over 40 per cent of spinning mills have been forced to shut down,” he said. “If the government does not urgently address the destructive impact of withdrawing the sales tax exemption on local supplies for export manufacturing, other sectors such as weaving and processing will soon follow, leading to the deindustrialisation of the entire upstream textile industry.”

Ahmad said that Pakistan, once home to a full textile and apparel value chain -- a rare asset in the global market -- has seen this vital sector deteriorate due to poor policies. “Apart from India and China, no other country possesses this capability. But it’s now better to speak of this in the past tense, as these sectors are now on life support.”

He further stressed the critical need to increase exports and add value to domestic exports to meet Pakistan’s external liabilities, which exceed $100 billion over the next five years. Losing one of the most valuable links in the textile and apparel value chain would be devastating for the country’s economic future.

The APTMA urgently calls on the government to strengthen checks and balances on firms misusing the EFS to protect the domestic industry. The association also advocates for implementing credible penalties for those facilitating fraudulent activities. A thorough reappraisal of all EFS holders should also be conducted to improve transparency and accountability, and EFS licences should be limited to firms that are genuinely engaged in manufacturing.

Ahmad demanded the government immediately restore the EFS to its pre-Finance Act 2024 form, including the sales tax exemption/zero-rating on all local supplies used for export manufacturing.