The Federal Board of Revenue (FBR) is poised to proceed with the imposition of sales tax on imported raw materials utilized in the production of finished goods under the Export Facilitation Scheme (EFS) in the upcoming federal budget for 2025-26. This move is expected to be a significant fiscal policy shift affecting Pakistan’s export-oriented industries.
This development was disclosed by FBR Member Inland Revenue Policy, Najeeb Ahmad, during a recent meeting of the National Assembly Standing Committee on Finance. Ahmad stated that this proposal, which was reportedly overlooked during last year’s budget formulation, has now resurfaced amid increasing pressure from the International Monetary Fund (IMF) to standardize tax treatment across all economic sectors.
Ahmad noted that the IMF has been consistently advocating for the elimination of special tax regimes and reduced rates, particularly those that have historically benefited exporters. “The Fund wants uniformity in tax policy. Exemptions for exporters cannot be justified when other sectors are taxed at standard corporate rates,” he added, explaining the rationale behind the proposed change.
In line with the IMF’s guidance, the government has already withdrawn the sales tax zero-rating on local supplies to registered exporters under the EFS through the Finance Act 2024. The matter has also been thoroughly reviewed by the Prime Minister’s Committee on EFS, which is chaired by Planning Minister Ahsan Iqbal, and recently submitted its recommendations on the matter.
Exporters Face Higher Tax Burden
Exporters had vehemently urged the government to reinstate the Final Tax Regime (FTR), a simplified 1% turnover tax system that previously offered predictable tax liabilities. However, the FBR representative explicitly ruled this out, citing the IMF’s firm objections to sector-specific concessions and preferential tax treatments. The shift to the normal tax regime—which subjects exporters to corporate tax rates that can be as high as 29%—has drawn sharp criticism and considerable concern from the wider business community.
MNA Naveed Qamar voiced significant concern during the committee meeting regarding the perceived dual tax burden faced by exporters. He argued that subjecting exporters to the normal tax regime alongside minimum tax provisions effectively results in de facto double taxation, severely impacting their profitability and competitiveness.
Echoing these profound concerns, President of the Karachi Chamber of Commerce and Industry (KCCI), Muhammad Javed Balwani, informed the committee that exporters are now contending with effective tax burdens ranging from a crushing 29% to an even higher 45%. He warned that such high taxation is severely hampering business viability and eroding Pakistan’s export competitiveness. Balwani also lamented that “small and medium exporters are disappearing from the market,” attributing this decline to a combination of high taxes, a severe liquidity crunch, and consistently delayed refunds under the FASTER system, which often takes months to process despite its promise of a 72-hour turnaround.
Balwani further added that the recent withdrawal of both sales tax zero-rating and Regional Competitive Energy Tariffs (RCET) for power and gas has additionally inflated the operational costs for export-oriented industries, making their products less competitive in international markets.
The upcoming federal budget is anticipated to be closely scrutinized by exporters and various trade bodies across the country, as they brace for further fiscal tightening and policy alignment dictated by the ongoing IMF program. The proposed changes signal a challenging period ahead for Pakistan’s export sector as it navigates a more standardized and less concessionary tax environment.
