EDITORIAL: Given the primacy of the textile sector in propping up the country’s exports and employment numbers, one would have thought that government policy would be geared towards ensuring that it sustains its growth, enhances its global competitiveness, addresses industry challenges and makes it resilient against international market fluctuations.
What we see instead is a policy mix that is contradictory and burdens the sector with regulatory and economic constraints.
The All Pakistan Textile Mills Association’s (APTMA’s) recent engagement with the finance minister highlighted the perfect storm created by the anomalies of the Export Facilitation Scheme (EFS), delayed tax refunds to manufacturers and soaring energy costs, which have all combined to threaten the sector’s overall stability and viability.
When it comes to the complications associated with the EFS, it is pertinent to note that the Finance Act 2024 removed zero-rating and sales tax exemptions on local raw materials, while imported inputs remained duty-free and sales tax-free.
Domestically produced raw materials instead face a substantial 18 percent sales tax, which is refundable. The refund system, however, is clearly dysfunctional.
As per Sales Tax Rules 2006, refunds should be processed within 72 hours, yet exporters frequently experience delays of over six months, with only 70 percent of claims being processed, while the remaining 30 percent remain indefinitely stuck. This has led to an accumulated outstanding refund amount of Rs329.5 billion, creating a severe liquidity crunch for the sector.
As argued by APTMA, the EFS instead of driving export growth as intended, has ended up favouring those importing duty-free inputs, while causing substantial harm to local industry, leading to the shutdown of over 100 spinning mills — equivalent to 40 percent of the sector’s production capacity — while many others struggle to operate at less than half their potential output. The spinning industry, therefore, faces a significant slowdown, with hundreds of thousands having lost their jobs, and its decline is set to trigger broader economic fallout.
It is clear that flawed taxation and import regimes are failing domestic manufacturers, and the government must assess whether its policies truly boost exports and tax collection or merely exacerbate the textile industry’s struggles.
Domestic manufacturers deserve a level playing field and duty-free imports must not undercut local industry. Given this, APTMA’s proposal for a graduated sales tax regime — taxing inputs at lower rates than final goods to promote local manufacturing and curb tax evasion — should be given due consideration.
However, it is also important to recognise that even if local inputs were subject to a sales tax-free regime, domestic manufacturing will still be in the doldrums due to spiraling energy costs it has to bear.
As the International Energy Agency has also highlighted recently, Pakistan’s industrial sector faces significantly higher electricity costs — nearly double those of China, India and the US, and well above the rates in the European Union — severely weakening its export competitiveness.
As has been well-documented, excessive transmission and distribution losses, coupled with the incompetence, and administrative and operational inefficiencies of DISCOs, have led to high energy tariffs for industries. While APTMA has put forward several demands to tackle this issue, and the government may take some into consideration, the reality is that reducing energy tariffs is a complex challenge. It requires sweeping reforms of the power sector and the broader energy value chain, prioritising reducing electricity generation costs, addressing system losses and power theft, and significantly upgrading the country’s T&D infrastructure.
The EFS’ shortcomings, along with flawed taxation policies and escalating energy costs, have collectively created a crisis for the textile sector.
The government must urgently resolve policy contradictions and adopt a more balanced strategy that focuses on enhanced exports and tax revenue, but without undermining domestic manufacturing.
Copyright Business Recorder, 2025
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