Tax on export proceeds to go down to 1.25pc

ISLAMABAD: The government has proposed to reduce tax collection on export proceeds (one percent withholding tax and one percent advance tax) from 2 percent to 1.25 percent in order to encourage exports under the Finance Bill 2026.

At present, exporters effectively bear an aggregate tax burden of 2 percent on export proceeds through one percent advance tax and one percent minimum tax.

Under the finance bill, the budget proposes to reduce this burden to an aggregate minimum tax of 1.25 percent, thereby improving exporters’ competitiveness and liquidity.

The concessionary tax regime of 0.25 percent for IT and IT-enabled service exporters has been extended till 2029, providing long-term certainty to one of Pakistan’s most promising export sectors.

Section 8B of the Sales Tax Act presently requires payment of a minimum value addition tax of 10% (adjustable/refundable), except where exports exceed 50% of monthly sales.

Considering the significant industrial capacity created through machinery imported under the TERF financing scheme, many industries possess substantial excess production capacity. Increased utilization of this capacity would not only improve industrial efficiency but would also result in greater electricity consumption, thereby reducing the impact of capacity payments on the national exchequer.

Accordingly, the export threshold should have been reduced from 50 percent to 10 percent, enabling manufacturers with excess installed capacity to aggressively pursue export opportunities without suffering adverse cash flow consequences.

Such a measure would have encouraged exports without any material impact on overall tax revenues, tax experts said.

The FASTER sales tax refund system currently allows refund processing of approximately 12 percent for erstwhile zero-rated sectors, whereas exporters in other sectors are generally subject to limits ranging between 2 percent and 8 percent.

Tax expert said that a uniform refund threshold should be introduced for all exporting sectors to ensure a level playing field and encourage export diversification.

The government should consider providing policy guidelines and targeted protection through regulatory duties in sectors where substantial investments have already been made in machinery and capacity expansion.

Such measures would encourage local manufacturing, improve utilization of installed capacity and reduce unnecessary imports, they said.

Under the Eleventh Schedule to the Sales Tax Act, 1990, registered persons purchasing waste paper, paperboard and plastic waste are required to withhold 80 percent of sales tax, even where such materials are supplied by registered taxpayers.

Historically, these materials were predominantly purchased by undocumented sectors and used in the manufacture of substandard products.

Subsequently, considering both environmental concerns, and increasing international demand for recycled products, documented corporate entities entered the sector and invested significant resources in modern recycling facilities and machinery.

This transition gained further importance after February 2016, when Pakistan’s National Assembly unanimously adopted the United Nations Sustainable Development Goals (SDGs) as Pakistan’s national development agenda, making Pakistan one of the first countries to formally integrate the SDGs into its national planning framework.

Furthermore, use of recycled materials reduces dependence on imported virgin raw materials and results in significant foreign exchange savings for the country.

Despite Pakistan’s commitment to the SDGs, the current tax framework effectively discourages formal sector participation in recycling initiatives. Rationalization of these provisions would support environmental sustainability, documentation of the economy, export growth and import substitution simultaneously.

However, considering the changing global economic environment and Pakistan’s emerging opportunities, greater emphasis on export promotion, industrial capacity utilization, recycling initiatives and import substitution could have generated significant long-term economic benefits without materially affecting government revenues.

The time appears right for Pakistan to aggressively pursue policies that encourage exports, conserve foreign exchange and strengthen domestic industry.

Copyright Business Recorder, 2026