he federal government’s decision to impose an 18 per cent sales tax on imported cotton yarn under the export facilitation scheme has sparked a lively debate between spinning mills and value-added textile exporters over its impact on exports and local industry.

The federal budget for 2025-26 has imposed an 18 per cent sales tax on imported cotton yarn under the EFS. This measure aims to ensure a level playing field for domestic cotton growers and spinning mills. Finance Minister Muhammad Aurangzeb explained during his budget speech that the 2024-25 budget had imposed the sales tax on local purchases under EFS, while imported yarn remained exempt. He said this was unfair to the local producers.

According to the All Pakistan Textile Mills Association, Pakistan imported $2.185 billion worth of yarn and grey fabric in FY2023-24. Due to changes in EFS, this figure surged to $3.64 billion in the first ten months of FY2024-25. Meanwhile, local yarn production dropped from 111.3 million kg in July 2023 to just 66.19 million kg by June 2024.

APTMA chairman Kamran Arshad stated that the shift to imported yarn, triggered by GST on local products, had led to the closure of over 800 ginning factories and 120 spinning mills by May 2025, affecting millions of livelihoods. He said the looms too had started shutting down, straining the weaving sector.

He emphasised that the rising reliance on imported yarn (300 million kg in FY2024-25 compared to 108 million kg the previous year) had resulted in an additional $1.5 billion in foreign spending. Meanwhile the textile exports had increased by just $1.14 billion.

The textile exporters say they face serious challenges due to high energy tariffs. The electricity costs 14-16 cents/ kWh and gas $12/ MMBTU in Pakistan, compared to 5-7 cents and $3.8-5/MMBTU in Uzbekistan and China, the major regional yarn exporters. Delayed GST refunds, often taking longer than six months, add to the burden. The inefficiency raises production costs by 10-15 per cent, weakening Pakistan’s global competitiveness.

Welcoming the imposition of GST on imported cotton yarn, the APTMA has called for this policy to be extended to all cotton, polyester yarns and grey fabrics to ensure fair competition and sustainability.

On the other hand, the value-added textile sector has criticised the new policy, calling it counterproductive and contrary to the government’s stated goal of boosting exports. Chaudhry Salamat Ali, patron-in-chief of the Pakistan Hosiery Manufacturers and Exporters Association, has warned that imposing sales tax at the import stage under the EFS will deal a severe blow to apparel and textile exporters already under financial stress.

He argued that the spinning units represented by the APTMA use obsolete machinery, producing low-quality and high-cost yarn, unsuitable for manufacturing globally competitive value-added garments. “That’s why the government had previously allowed duty-free yarn imports under the EFS, a policy aligned with best practices followed by countries like Bangladesh and Vietnam,” he said.

The federal budget for 2025-26 has imposed an 18 per cent sales tax on imported cotton yarn under the export facilitation scheme (EFS). This measure aims to ensure a level playing field for domestic cotton growers and spinning mills.

Salamat Ali challenged APTMA’s claim that more than 100 spinning mills had shut down, calling it a “gross misrepresentation.” He also urged that commercial importers be allowed to import yarn under the EFS to support small and medium-sized exporters. “Apparel industries in Bangladesh and Vietnam also depend on imported raw materials. They are supported by similar government schemes. Imposing sales tax on imports under the EFS undermines the scheme’s original intent.”

Introduced in 2021, the EFS was designed to enhance export competitiveness by supporting value-added textile exporters. Initially, around 800 exporters were registered under the scheme. That number has now grown to around 2,000.

Meanwhile, advisor to the Punjab minister for industries, commerce and investment, Naeem A Butt, has defended the federal government’s decision, calling the sales tax on imported cotton yarn a sound decision. He says Pakistan is undertaking strategic reforms to increase global competitiveness and move toward a $100 billion export target.

Key reforms, he says, include the 18 per cent sales tax on imported yarn to support local spinners, streamlining export facilitation procedures and ensuring prompt tax refunds to enhance liquidity for exporters.

“The government aims to diversify the sector by promoting man-made and technical textiles, improving market access beyond traditional regions,” he adds. “These reforms are intended to strengthen domestic value chains, create employment and ensure long-term sustainability of Pakistan’s textile industry.”

Experts emphasise the need for a balanced policy that encourages the consumption of locally produced yarn without imposing additional financial burdens on exporters. They argue that while reducing reliance on imported yarn is important, a solution lies in removing the sales tax on local yarn purchases made by textile exporters.

Experts suggest that exempting exporters from sales tax on domestic yarn would not only revive the struggling spinning industry but also boost exports. To ensure transparency and prevent misuse, the Federal Board of Revenue could issue a verified list of textile exporters who export 80 per cent or more of their production. Only those on the list should be eligible to purchase local yarn without paying the sales tax.

Additionally, experts propose restricting the import of specific yarn counts that are not used in the manufacturing of export-oriented goods. Such targeted measures, they argue, will protect local industry while maintaining the competitiveness of Pakistan’s value-added textile sector in global markets.

The imposition of sales tax on imported cotton yarn reflects the government’s attempt to level the playing field for domestic spinners and cotton growers, aiming to reduce import dependency and revive local production.

However, a balanced approach is essential to ensure that this policy does not undermine the export growth or strain value-added exporters. Exempting verified exporters from sales tax on local yarn, refining import regulations and ensuring timely tax refunds could help support both upstream and downstream players in Pakistan’s textile value chain. Achieving export competitiveness alongside domestic industrial sustainability will require targeted, transparent and inclusive policy measures.