ISLAMABAD: The Federal Board of Revenue (FBR) will implement viable recommendations of the new National Industrial Policy (NIP) in the next federal budget, including changes in fiscal laws dealing with income tax, withholding tax regime, sales tax, and federal excise duty rates for domestic sectors.
Sources told Business Recorder the tax authorities are reviewing the new NIP, which extensively talks about the uneven sectoral tax burden. The industry faces heavier taxes than sectors such as real estate, construction, wholesale and retail outlets, which lower the return of industrial investment relative to other sectors.
The manufacturing and mining together constitute 13.5 percent of GDP, but their contribution in generating tax revenue is around 58 percent. This creates supernormal post-tax returns on non-industrial sectors and undermines manufacturing investment and has even resulted in industrial land within the Special Economic Zones being “colonised” for real-estate use.
Finance Division, not FBR, will present next year’s budget
Multiple layers of taxation put exporters at a disadvantage relative to regional competitors: corporate income tax is high relative to the region; the Export Development Fund surcharge acts as a tax on exports; large firms face additional super tax; and working capital is tied up in withholding tax, delayed VAT refund claims, and pending DLTL claims.
The policy revealed that high taxes on imports – customs duty (CD), regulatory duty (RD), additional customs duty (ACD), VAT, and withholding taxes – make production for the domestic market more profitable than exporting to foreign markets, preventing firms from entering global value chains.
Tariffs on imported inputs have raised the cost of exporting, and higher “cascading” tariffs on final goods have greatly raised profits on sales to the domestic market.
The combined average tariffs on consumer goods are 35.4 percent against Bangladesh at 19.9 percent and Vietnam at 12 percent. Imports used in manufacturing exports are further subject to sales tax and withholding tax (advance collection of corporate income tax), which further undermines the competitiveness of Pakistan’s exports.
According to the policy, the tariff reform needed to re-orientate the economy away from import-substitution towards exports. Implement the proposals of the Tariff Policy Board, which suggested significant reductions of Customs Duty (CD), Regulatory Duty (RD), and Additional Customs Duty over the next five years.
Each Customs Duty band (slab) should be reduced so that it results in near-zero tariffs on inputs, intermediate goods, and capital goods with modest protection on final goods in line with dynamic regional economies.
The Regulatory Duty and Additional Customs Duty should be eliminated over five years, and the exemptions specified in the 5th Schedule to the Customs Act phased out over the same period.
Following the most recent proposals of the Tariff Policy Board, the average tariff weighted by trade should be reduced to below 5 percent by 2030. The policy calls for conducting a detailed review of tariffs and taxes faced by industry within 6 months.
The Tax Policy Unit will incorporate the review into its tax rationalization plan in consultation with the Federal Board of Revenue (FBR) and the Prime Minister’s Office (PMO) within six months and will determine a timeline in which a gradual reduction may be made based on the availability of fiscal space. This review will consider the reduction or elimination of value-added tax (VAT) on the imported inputs for exports.
In most of the fast-growing Asian economies, exports are usually exempt from VAT, and thus VAT levied on imports that are used to manufacture exports lowers the competitiveness of Pakistani firms.
The current system of zero-rating exports ties up time and working capital as firms wait to reclaim the sales tax paid on inputs. The current Export Financing Scheme has enabled some exporters to gain access to the VAT-free import, the study will investigate how this could be extended to all exporters, including the SMEs.
Copyright Business Recorder, 2025
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