Govt considers abolishing 1pc advance tax for exporters in upcoming budget

WEB DESK: The federal government is actively considering a proposal to abolish the one per cent advance tax on exporters in the upcoming federal budget, a move that could provide a liquidity relief of around Rs100 billion to the struggling sector.

However, officials familiar with the budget discussions told Dawn that no broader fiscal support or wide-ranging reforms for the export industry are currently on the table, as the government remains severely constrained by stringent revenue targets and ongoing economic stabilisation commitments.

The 1pc advance tax, levied directly on export proceeds, has long been a major bone of contention for the industry.

Exporters have routinely criticised the levy as a liquidity-draining measure that ties up critical working capital, despite thin profit margins and perennially delayed tax refunds. Industry data highlights the scale of the burden, showing that exporters alone have paid nearly Rs200bn in excess on account of this specific advance income tax during the fiscal years 2024-25 and 2025-26.

Reacting to the development, a leading exporter remarked that the proposed move is “essentially returning a fraction of what has already been collected,” pointing to a cumulative onslaught of taxes, exorbitant energy costs, and blocked refunds that continue to choke industrial operations.

Regional tax disparities and liquidity crunch

The textile sector, which constitutes the backbone of Pakistan’s export economy, had submitted a comprehensive set of proposals ahead of the budget.

These included the restoration of the Final Tax Regime (FTR), a sharp reduction in energy tariffs, the immediate clearance of over Rs327bn in pending refunds, and the revival of various export incentives. Sources indicated, however, that most of these structural demands are unlikely to find space in the new budget.

Industry data paints a bleak picture of Pakistan’s export competitiveness, placing the country at a significant disadvantage in terms of effective taxation. Pakistani exporters face an estimated tax burden exceeding 68.27pc, far higher than regional competitors.

By contrast, Vietnam maintains a corporate tax rate of around 20pc, Bangladesh ranges between 22.5pc and 27.5pc, and India applies a graduated structure from 26pc to 34pc. These lower, predictable regimes allow regional competitors to retain healthy margins and reinvest in capacity expansion.

Furthermore, Pakistan’s indirect tax regime enforces a uniform 18pc General Sales Tax (GST) on both inputs and finished goods, with refund delays extending from several months to years.

Conversely, Bangladesh applies reduced or zero-rated Value Added Tax (VAT) on export inputs, India processes GST refunds within two to four weeks, and China and Vietnam offer near-immediate, automated refund mechanisms.

This fundamental divergence ensures that while regional peers enjoy smooth cash flows, Pakistani exporters have their vital working capital trapped in bureaucratic delays.

Energy crisis and industry pushback

Energy pricing has emerged as another critical roadblock for domestic manufacturers. Industrial electricity tariffs in Pakistan stand at approximately 11.5 cents per kilowatt-hour (kWh), compared to 6.3 cents in India, 8 cents in Vietnam, and just 5 cents in Uzbekistan.

The disparity is even sharper in gas pricing, with Pakistan charging $13.5 per mmBtu against $6 to $7 in India and Vietnam, and a mere $3 in Uzbekistan. Compounding the high tariffs are persistent supply reliability issues, whereas competing nations offer uninterrupted power alongside preferential industrial rates.

In a statement, Pakistan Textile Exporters Association (PTEA) Patron-in-Chief Khurram Mukhtar lamented that the export sector and the textile value chain are “fighting against a mindset that appears bent on penalising the very ecosystem that earns foreign exchange, creates jobs and sustains documented economic activity.” He noted that under the current framework, the more firms export, the more financial losses they incur.

According to the government’s own documented figures, the recent policy shift from the FTR to the Normal Tax Regime (NTR) resulted in an additional revenue extraction of approximately Rs90bn from the sector. Mr Mukhtar emphasized that the entire textile chain had converged to recommend that exporters be given the option to voluntarily opt between FTR and NTR, but this unified proposal is seemingly being sidelined.

While praising the fully digitalised Export Facilitation Scheme (EFS) as an excellent reform, the PTEA chief noted that the exclusion of domestic commerce from the scheme has disrupted the integrated textile value chain.

The industry has also reiterated demands for the phased abolition of the super tax, the Minimum Turnover Tax (MTR), inter-company dividend taxation, and taxes on non-cash bonus shares.

To ease the capital squeeze, the sector has proposed a progressive GST framework taxing raw materials at 5pc and fabrics at 10pc ensuring revenue is collected at the final product stage rather than trapping capital throughout the manufacturing lifecycle.