APTMA Calls for Restoring Export Facilitation Scheme
Staff Report
ISLAMABAD– All Pakistan Textile Mills Association (APTMA) has called for restoring Export Facilitation Scheme to protect the long-term sustainability of Pakistan’s textile exports and create room for negotiations with the U.S. before the 90-day suspension of reciprocal tariffs comes to an end.
“The government should immediately address the sales tax disparity between local and imported supplies for exports and create a level playing field for the industry,” Chairman APTMA Kamran Arshad, Chairman PCGA Dr. Jassu Mal, and Former Chairman PCGA Sohail Harral said during the joint press conference here.US Tariffs as an Opportunity for Growth
The first best solution is to restore the Export Facilitation Scheme to the June 2024 position with zero rating on local supplies for exports. However, the IMF has not been agreeable to this despite repeated efforts on the part of the industry and government,” they said adding that under this scenario, the only viable alternative is to implement a negative list of high-risk imports under EFS, which includes all yarn and cloth.
They said that this is necessary to restore competitiveness for domestic suppliers, revive the spinning industry, support rural livelihoods, protect the long-term sustainability of Pakistan’s textile exports, and create room for negotiations with the U.S. before the 90-day suspension of reciprocal tariffs comes to an end.
The textile sector of Pakistan is facing a critical challenge due to sales tax disparity under the Export Facilitation Scheme. Under the FY25 budget, the sales tax exemption on local supplies for exporters was removed, while imports of the same raw material and inputs are duty-free and sales tax-free. This policy shift has created a significant disadvantage for local suppliers and is severely impacting the sustainability of the domestic industry and value chain, particularly small and medium enterprises (SMEs).
Although the 18% sales tax refund is technically available on local inputs, the refund process remains plagued by lengthy delays, partial disbursements, and high administrative costs. On average, only 60–70% of claimed refunds are processed, with the remainder deferred for manual processing, with no progress in the last 4-5 years. Even if sales tax is refunded within 72 hours as per the rules, there is still a 6-to-10-month period between when inputs are purchased, and sales tax is paid to when the manufactured goods are exported, and refunds can be claimed. As a result, local procurement causes significant liquidity issues for exporters, who can import the same input without the hassle of going into the refund process.
Due to this sales tax disparity, exporters overwhelmingly prefer imported inputs, pushing local suppliers out of business. During FY25, imports of only raw cotton, yarn, and greige cloth will increase by $1.6 billion, whereas export growth during the same period is projected to reach $1.5 billion. This means the increase in exports will be more than offset by an increase in imported inputs, leading to a net outflow of foreign exchange.
Over 120 spinning mills have shut down due to the EFS anomaly, and most others are operating below 50% utilization, teetering on the edge of closure. Thousands of jobs have been lost. Similar trends are observed in the weaving sector, and the disruption will soon spill over further downstream, and destabilize the entire textile value chain.
Since the spinning sector is the main consumer of cotton, its decline will also wipe out Pakistan’s cotton economy. Amid falling demand and no support price, cotton farmers are rapidly shifting to water-intensive alternatives. The viability of local cotton is further undermined by the EFS sales tax disparities. Already, cotton production is at a historic low of 5 million bales and is expected to decline further.
The cotton economy supports $2–3 billion in rural incomes and is a major source of employment for women in cotton picking. If the spinning industry collapses, countless more livelihoods will be lost, rural poverty will rise, and there will be severe ripple effects on the entire economy.
It is estimated that Pakistan’s net foreign exchange earnings could be $1.5–2 billion higher if locally sourced inputs were treated on par with imports. Instead, the current policy is expanding the trade deficit, shrinking tax revenues, and accelerating job losses.
Moreover, the United States has signaled that it may impose a 29% tariff on all Pakistani exports if the ongoing trade surplus is not addressed. Pakistan’s main import from the United States is cotton, accounting for 36% of imports. There is significant room for expansion in this to address the trade imbalance with the U.S. The U.S. is already offering to export up to 1.5 million bales of cotton to Pakistan. However, it is not possible to absorb these volumes without a functional spinning industry, and the opportunity will be lost if the EFS disparity is not addressed.
