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Pakistan’s textile sector remains the backbone of the national export economy.
It generates the largest share of foreign exchange earnings, supports millions of jobs, and underpins much of the country’s manufacturing base.
Because of its central role, the sector’s tax treatment has consequences far beyond the industry itself.
For years, textile exporters have consistently called for a simpler and fairer tax structure.
The Pakistan Textile Exporters Association (PTEA) has led these efforts, backed by allied bodies across the value chain.
Their core demand has remained steady across multiple budget cycles: meaningful tax rationalization is essential if Pakistan wants to grow exports and compete effectively with regional rivals.
The Tax Burden On Exporters
The main grievance centers on the complexity and weight of the current tax regime.
Banks collect a 1 percent advance tax on export proceeds, which is treated as a minimum tax rather than a final tax.
An additional advance tax under sub-section 6C of Section 147 results in double taxation.
Exporters view this structure as discriminatory.
Local textile suppliers pay only 1 percent advance tax on domestic supplies, while yarn traders pay as little as 0.5 percent.
Industry estimates put the effective tax burden on exporters at around 68 percent.
Large exporters also face a super tax of up to 10 percent.
To ease the pressure, exporters want the advance tax on export proceeds capped at 1 percent and the final tax regime restored.
They also call for the removal of the super tax, arguing that these changes would restore confidence and free up much-needed working capital.
The Export Facilitation Scheme
A second major priority is the Export Facilitation Scheme (EFS).
The scheme allows exporters to import raw materials and inputs without paying duties and sales tax, provided those inputs are used for re-export.
It was introduced in 2021 to consolidate older duty and tax schemes into a single digital system linked to the Pakistan Single Window.
A later change applied sales tax to locally sourced inputs while keeping imported inputs tax-free.
Exporters argue that this anomaly penalizes the domestic supply chain and encourages buyers to source from foreign suppliers instead.
The sales tax also ties up liquidity, as refunds are slow to arrive.
Pending refunds have been reported at over Rs 327 billion, creating significant cash flow strain across the sector.
Exporters further highlight the financing limit under the scheme through EXIM Bank, currently capped at Rs 235 billion.
They want this limit raised in phases toward Rs 1.2 trillion to support a textile export target of $35 billion by 2030.
Protection For Local Fibre And Global Competitiveness
Exporters also raise concerns about the protection given to local polyester fibre manufacturers.
They argue that this protection increases input costs for value-added producers and limits their ability to compete in synthetic garments, a category with strong and growing global demand.
To address this, they want import duties aligned with those of regional competitors such as Vietnam, China, and Türkiye.
A more level cost base, they say, would help Pakistani exporters secure a larger share of synthetic textile orders.
Encouraging A Digital Economy
Exporters have proposed capping cash withdrawals at 10 percent of a company’s previous annual turnover.
The goal is to shift more transactions into digital channels, improve transparency, and reduce informal trade within the supply chain.
Easing Trade With Back To Back Letters Of Credit
Another proposal involves allowing back-to-back Letters of Credit against master Letters of Credit, subject to a minimum 35 percent value addition.
This would enable exporters to scale production and shipments without locking up additional financial collateral, thereby improving the overall ease of doing business.
Where The Reform Agenda Stands
These proposals have been repeated across recent budget cycles, yet most remain unaddressed.
In the FY2025-26 budget, the core demands went largely unmet.
Revenue targets and stabilization commitments left limited room for relief, so the layered advance tax and super tax stayed in place, and refund delays continued.
Heading into the FY2026-27 budget, the government has signaled its intent to scrap the 1 percent advance tax on export proceeds, a move that could release meaningful liquidity.
However, the broader request to restore the final tax regime remains uncertain.
The stakes are rising.
Some global buyers have already begun shifting orders toward Vietnam and Bangladesh, where cost and tax conditions are more favorable.
Each budget decision directly shapes the cost base of an industry that carries the bulk of Pakistan’s exports.
The sector’s future competitiveness will depend heavily on the outcome of the current reform debate.
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