The All Pakistan Textile Mills Association, Southern Region, has highlighted the tremendous losses and unemployment due to misuse of the Export Facilitation Scheme, which exempts cotton and blended yarns from sales tax and duties on imports. Due to this, there has been a marked increase in the import of yarn under the pretext of using it to export textile products. However, many of these yarns are being sold in the domestic market. As a result, the domestic yarn manufacturing industries are faced with losses and closures, which has caused the loss of hundreds of thousands of textile workers’ jobs and livelihoods. While we appreciate genuine exporters, unscrupulous elements are misusing this scheme to evade sales tax and customs duties, thus causing loss of Millions of Rupees of government revenues and also crippling the domestic industry.
APTMA has raised this issue at all levels of government and called for an immediate review of the scheme to create a level playing field. Unfortunately, our pleas have remained without any tangible action, and the domestic industry continues to close down. The withdrawal of zero-rating on local supplies for export manufacturing under the Finance Act 2024 was posed as a revenue-enhancing measure; rather, it is having the opposite impact by forcing a decline in business activity and, thus, the government’s revenue collection.
Coupled with high energy prices, the textile industry, especially the spinning sector, is facing insurmountable problems. Local manufacturers, who previously supplied to exporters, are now rapidly shutting down as exporters purchase duty-free and sales-tax-free inputs from abroad over domestically manufactured ones that are subject to an 18% sales tax. While the sales tax is, in principle, refundable, the FBR continues to delay sales tax refunds to exporters, which entails an opportunity cost of at least 20% per annum.
Imports of yarn and other inputs imported under EFS are also increasingly and illegally flooding the domestic market to the detriment of the local industry. This yarn, imported duty-free and sales-tax-free, is being sold in the domestic market at rates that the domestic industry cannot compete with due to higher production costs, which in and of themselves are a result of callous policymaking that have caused energy prices to skyrocket, and domestic cotton production to plummet.
Over 40% of spinning mills have been forced to shut down. Suppose the government does not immediately address the destructive impact of the withdrawal of the sales tax exemption on local supplies for export manufacturing on the domestic industry. In that case, it is only a matter of time before this spills over to other sectors, such as weaving and processing, and the entire upstream textile industry is deindustrialized. Pakistan once had a full textile and apparel value chain, a rare global asse. Apart from India and China, no other country has this capability. But it’s better to speak of this in the past tense because these sectors are now on life support thanks to blundersome policies.
It needs no reminding that Pakistan’s external liabilities over the next five years are in excess of $100 bn. The country is in desperate need of increasing exports and adding domestic value to exports to meet its external obligations in a sustainable manner without taking on more expensive debt. At this time, we cannot afford to lose one of the most valuable links of the textile and apparel value chain.
We urgently call on the government to strengthen checks and balances on firms misusing the EFS to protect Pakistan’s domestic industry and implement credible penalties for those facilitating and engaging in fraudulent activities. Moreover, a rigorous reappraisal of all EFS holders should be conducted for improved transparency and accountability. EFS licenses should be limited to only those firms engaged in manufacturing.
Finally, we strongly urge the government to immediately restore EFS to its pre-Finance Act 2024 form, including the sales tax exemption/zero-rating on all local supplies used for export manufacturing.
