The federal government is contemplating the elimination of the one per cent advance tax on exporters in the forthcoming federal budget, a step that could provide liquidity relief estimated at around Rs100 billion to the struggling export sector.
Meanwhile, no comprehensive fiscal support or broad reforms for the export industry are expected, as the government remains bound by strict revenue targets and commitments to economic stabilization. The advance tax, imposed directly on export proceeds, has long been a contentious issue within the industry.
Exporters have consistently criticized this levy as a drain on liquidity, tying up essential working capital despite narrow profit margins and frequent delays in tax refunds. Industry figures reveal that exporters have paid nearly Rs200 billion in excess advance income tax during the fiscal years 2024-25 and 2025-26 alone.
In response to the potential tax removal, a prominent exporter described the move as “essentially returning a fraction of what has already been collected,” highlighting the cumulative burden of multiple taxes, high energy costs, and blocked refunds that continue to stifle industrial activity.
The textile sector, which forms the backbone of Pakistan’s export economy, had submitted detailed proposals before the budget announcement. These included restoring the Final Tax Regime (FTR), significantly reducing energy tariffs, clearing over Rs327 billion in pending refunds, and reviving various export incentives. However, most of these structural reforms appear unlikely to be included in the new budget.
Data on export competitiveness paints a grim picture, showing Pakistan’s exporters face an effective tax burden exceeding 68.27 per cent, placing them at a severe disadvantage compared to regional rivals. For instance, Vietnam’s corporate tax rate is around 20 per cent, Bangladesh’s ranges between 22.5 and 27.5 per cent, and India applies a graduated rate from 26 to 34 per cent. These lower, more predictable tax regimes enable competitors to maintain healthier profit margins and reinvest in capacity expansion.
Furthermore, Pakistan’s indirect tax system enforces a uniform 18 per cent General Sales Tax (GST) on both inputs and finished goods, with refund delays stretching from several months to years. In contrast, Bangladesh applies reduced or zero-rated VAT on export inputs, India processes GST refunds within two to four weeks, and China and Vietnam offer near-immediate automated refund mechanisms. This disparity results in Pakistani exporters having their crucial working capital locked in bureaucratic delays, while competitors enjoy smoother cash flows.
Energy costs have also become a significant obstacle for domestic manufacturers. Industrial electricity tariffs in Pakistan are approximately 11.5 cents per kilowatt-hour (kWh), compared to 6.3 cents in India, 8 cents in Vietnam, and just 5 cents in Uzbekistan. The gap is even wider in gas pricing, with Pakistan charging $13.5 per mmBtu, while India and Vietnam pay between $6 and $7, and Uzbekistan only $3. Additionally, Pakistan faces ongoing supply reliability issues, whereas competing countries provide uninterrupted power with preferential industrial rates.
Khurram Mukhtar, Patron-in-Chief of the Pakistan Textile Exporters Association (PTEA), expressed concern that the export sector and textile value chain are battling a mindset that seems intent on penalizing the very ecosystem responsible for earning foreign exchange, generating jobs, and sustaining documented economic activity. He pointed out that under the current system, increased exports lead to greater financial losses for firms.
Government data indicates that the shift from the Final Tax Regime to the Normal Tax Regime has resulted in an additional revenue extraction of about Rs90 billion from the sector. Mr. Mukhtar emphasized that the entire textile chain had agreed on a proposal allowing exporters to choose voluntarily between the FTR and NTR, but this unified recommendation appears to be overlooked.
While acknowledging the fully digitalized Export Facilitation Scheme (EFS) as a positive reform, the PTEA chief noted that excluding domestic commerce from the scheme has disrupted the integrated textile value chain. The industry has also reiterated calls for the phased removal of the super tax, Minimum Turnover Tax (MTR), inter-company dividend taxation, and taxes on non-cash bonus shares.
To alleviate the capital constraints, the sector has proposed a progressive GST framework that would tax raw materials at 5 per cent and fabrics at 10 per cent, ensuring revenue collection occurs at the final product stage rather than trapping capital throughout the manufacturing process.
