KARACHI: The Pakistan Business Forum (PBF) has called on the federal government to exempt yarn and fabric from the 18% General Sales Tax (GST) in the coming Federal Budget 2025–26, warning that the failure to do so could push the country’s textile industry toward total collapse.
PBF Chairman South Punjab, Malik Talat Suhail emphasised that the Export Finance Scheme (EFS), introduced to phase out subsidies and promote exports, has instead proven detrimental to the textile sector. Under EFS, imported raw materials are exempted from both sales tax and customs duty, while local inputs continue to be taxed at 18%.
Though this tax is technically refundable, in practice, only 60–70% of refunds are released. The refund process is plagued by delays, manual processing, and high costs—issues that disproportionately harm small and medium-sized enterprises (SMEs).
This imbalance has led many exporters to favor imported inputs, causing serious damage to local suppliers. As a result, Pakistan’s import of cotton, yarn, and greige fabric surged by $1.5 billion in FY 2025, climbing from $2.19 billion to $3.64 billion. In contrast, textile exports rose by only $1.4 billion, and net textile exports are projected to decline from $14.0 billion to $13.6 billion. Over 120 spinning mills and more than 800 ginning factories have shut down, while protests from loom workers in Faisalabad are growing. SMEs are particularly vulnerable, as they face multiple tax payments at every stage of production and have limited access to cheaper imported alternatives, unlike larger firms.
The current situation has placed severe pressure on the country’s foreign exchange reserves, especially as the number of commercial import licenses has tripled—from 800 to 2,400.
Meanwhile, local cotton production has fallen to a historic low of just 5 million bales, with further declines anticipated. Due to a lack of government support and declining demand, many farmers are abandoning cotton cultivation in favor of more water-intensive crops, placing further stress on national water resources.
The PBF also warned that the collapse of the cotton economy is stripping rural areas of $2–3 billion in income, with women cotton-pickers among the hardest hit. “Pakistan is currently the only country imposing an 18% sales tax on cottonseed and cotton feed, driving farmer income below the cost of production and hitting the poorest segments of society the hardest.”
Rising unemployment and declining rural earnings are further exacerbating the economic crisis.
The Forum stressed that if current policies are not revised, Pakistan could lose $4–6 billion in potential foreign exchange earnings. Instead, the country continues to rely on expensive foreign loans to cover rising import costs, worsening the trade deficit, unemployment, and tax collection shortfalls. International partners have also taken notice.
The United States has signaled that, unless Pakistan addresses its trade imbalance, it may impose a 29% tariff on all Pakistani exports. Though the US has offered to export up to 1.5 million bales of cotton and has invited a Pakistani trade delegation for discussions, the crumbling of local spinning capacity raises the critical question: who will consume the cotton if domestic mills shut down?
The PBF South Punjab chief has urged the government to immediately delist cotton, yarn, and fabric from the current EFS policy. He further stated that maintaining GST on local cotton while exempting imports under the EFS is effectively a “Pakistan-unfriendly policy”. It undermined local production, weakens the economy, and benefits only opportunistic importers. Without urgent reforms, the country risks facing a deepening economic crisis driven by misguided policy decisions.
Copyright Business Recorder, 2025
