Textile sector warns 113% effective tax burden is choking exports ahead of FY27 budget

Pakistan’s textile sector is facing an effective tax burden of up to 113% and has ₨828 billion trapped in refunds, advance taxes and GST blockages, the Pakistan Textile Council warned Prime Minister Shehbaz Sharif while urging sweeping fiscal and structural reforms in the FY2026-27 budget to prevent export growth from becoming financially unsustainable.

In a supplementary submission sent to the prime minister and other government authorities, PTC Chairman Fawad Anwar said Pakistan’s largest export sector was facing a liquidity crisis due to excessive taxation, delayed refunds and regulatory inefficiencies.

The council said exporters were operating on profit margins of only 3-4%, while the existing tax regime was eroding or exceeding those earnings.

According to the submission, nearly ₨20 billion is deducted or blocked through GST and advance income tax on every ₨100 billion of exports, significantly reducing exporters’ working capital.

The council said delays in GST and tax refunds, in some cases stretching from months to years, were worsening liquidity pressures and reducing available working capital below ₨80 billion.

PTC said exporters were effectively being penalised as higher exports resulted in more taxes and refund blockages instead of increased liquidity.

The submission stated that Pakistan’s exporters face an effective tax rate of up to 113%, compared to 35% in India, 28% in Bangladesh and 20% in Vietnam.

A key concern highlighted by the council was the 2% advance tax on gross turnover, which it said disproportionately impacts low-margin exporters.

According to PTC, the tax alone consumes nearly 67% of annual profits for firms operating at margins of around 3%.

The council argued that exporters were being taxed on turnover rather than profits, even during loss-making periods.

PTC estimated that around ₨828 billion, equivalent to nearly $3 billion, of exporters’ capital remains trapped in the regulatory system.

This includes ₨327 billion in outstanding refunds, some pending since 2011, ₨200.9 billion blocked in advance taxes and ₨300 billion tied up in GST on inventory.

The council estimated the annual financing cost of this trapped capital at approximately ₨99 billion.

The Pakistan Textile Council proposed reinstating the Final Tax Regime at 1% of export turnover, ensuring refund payments within 60 days with penalties for delays and immediately releasing ₨327 billion in outstanding refunds.

It also called for abolition of super tax on exporters and reduction in the corporate tax rate from 29% to 26%.

In a separate proposal, the council recommended reducing employer contributions to the Employees’ Old-Age Benefits Institution from 5% to 2%.

According to the submission, actuarial analysis showed the EOBI fund remained financially stable and could grow to ₨754.74 billion by FY2026.

The council said investment income alone exceeded benefit payments and the fund was projected to remain solvent until at least 2038 under the base scenario and until 2074 under extended projections.

PTC estimated that reducing employer contributions to 2% would save the textile sector around ₨28.8 billion annually without affecting worker benefits.

The council warned that failure to address these issues could slow export growth and weaken Pakistan’s largest source of foreign exchange earnings and employment.