When tax zealotry chokes export growth

Taxes on inputs for export goods do not generate sustainable revenue; they merely reduce export volumes

ISLAMABAD:

Pakistan's value-added garments sector has long been regarded as the country's most promising engine for export growth. It combines labour intensity with high value addition, links backward industries such as spinning and weaving with global markets, and has the potential to generate employment on a scale unmatched by most other sectors.

However, despite this inherent strength, policy choices in recent years have steadily undermined its competitiveness. The latest demands by exporters to restore the Export Facilitation Scheme (EFS) to its original form are not merely routine lobbying; they reflect a deeper structural failure in tax policy and administration.

When the Export Facilitation Scheme was introduced through SRO 957(I)/2021, its core objective was clear: remove the burden of duties and taxes from export production. It consolidated earlier fragmented schemes and allowed exporters to import inputs free of customs duty, sales tax and other levies, while also permitting zero-rated local supplies. This was not a concession but a recognition of a fundamental principle: exports must be tax neutral. The scheme aimed to eliminate the need for refunds, reduce compliance costs and ensure liquidity for exporters operating in highly competitive global markets.

That principle has since been diluted. Changes introduced in recent budgets have effectively reversed the logic of the scheme. Zero-rating on local supplies has been withdrawn, duties and taxes have been imposed on imports for exporters, and the system has been pushed back into a refund-based regime. Exporters who were earlier insulated from upfront taxation are now forced to pay taxes first and wait for refunds later. The result is predictable: liquidity pressures, delayed refunds and rising cost of doing business.

The scale of the problem is not trivial. Exporters report that billions of rupees are currently stuck in refund claims, effectively converting the state into a borrower of working capital from the private sector. This is precisely what the original EFS sought to avoid. A scheme designed to eliminate refunds has been transformed into one that depends on them. The contradiction is not merely administrative; it reflects a deeper policy inconsistency.

The garments sector is particularly vulnerable to such distortions. Unlike primary textiles, value-added garments rely heavily on timely availability of high-quality inputs, often imported, and operate on thin margins in highly competitive markets. Even small disruptions in cash flow can lead to loss of orders. As industry representatives have repeatedly pointed out, the sector already faces high energy costs, expensive credit and infrastructural constraints. Adding tax-induced liquidity shocks further weakens its ability to compete internationally.

The irony is that the EFS was originally conceived precisely to address these challenges. It merged earlier schemes such as Duties and Tax Remission for Export (DTRE), manufacturing bonds and export-oriented units into a single automated framework, reducing documentation and improving ease of doing business. It recognised that export competitiveness depends not only on production efficiency but also on policy stability and predictability. By ensuring duty-free access to inputs and eliminating refund delays, it provided a level playing field to exporters.

The shift away from this framework reflects what may be described as tax over-zealotry. In an effort to maximise short-term revenue, policymakers have reintroduced upfront taxation even in sectors where such taxation is economically counterproductive. This approach ignores a basic economic reality: taxes on export inputs do not generate sustainable revenue; they merely reduce export volumes. The apparent gain in tax collection is offset by loss of foreign exchange earnings, employment and industrial growth.

This is not an isolated policy inconsistency but part of a broader pattern. Pakistan's tax system has increasingly relied on advance and withholding taxes rather than expanding the tax base. The same mindset that treats mobile users as taxpayers and imposes advance taxes on low-income individuals is now being applied to exporters. In both cases, the focus is on immediate collection rather than long-term growth. The consequences are already visible. Export growth has remained uneven, and Pakistan continues to lag behind regional competitors in value-added exports. Countries such as Bangladesh and Vietnam have built export ecosystems that minimise tax distortions and ensure rapid refunds or duty-free input regimes. Pakistan, by contrast, has moved in the opposite direction, reintroducing complexities that discourage investment.

The demand to restore the EFS to its original form is therefore not merely a sectoral demand; it is a test of policy coherence. If exports are to be treated as a priority, then the tax system must align with that objective. This requires returning to the principle of zero-rating and duty-free inputs for export production, not as a concession but as a necessity.

The issue also raises broader questions about governance and accountability. Frequent policy changes, often introduced without adequate consultation, create uncertainty for businesses. Exporters plan investments and production cycles over long horizons. Sudden changes in tax treatment disrupt these plans and erode confidence. Stability of policy is as important as its content.

There is also a need to revisit the underlying philosophy of taxation. Revenue mobilisation cannot be pursued in isolation from economic growth. A tax policy that undermines export competitiveness ultimately weakens the revenue base itself. The objective should be to expand the economy and then tax the resulting income, not to extract revenue in ways that constrain growth. Pakistan's value-added garments sector still retains significant potential. It has demonstrated resilience despite structural constraints and policy inconsistencies. With the right policy framework, it can become a major driver of export growth, employment generation and industrial development. But this potential cannot be realised if tax policy continues to work at cross-purposes.

Restoring the EFS to its original form would be a first step in correcting this course. It would signal a commitment to export-led growth and recognition of the need for policy consistency. More importantly, it would reaffirm a principle that should guide all export policy: exports should be free of domestic taxes.

The choice facing policymakers is clear. They can continue to pursue short-term revenue through tax over-zealotry, or they can adopt a coherent policy that supports export growth. The former offers immediate but unsustainable gains; the latter promises durable economic benefits.

In the end, the issue is not merely about one scheme or one sector. It is about whether Pakistan's tax system will serve as an instrument of growth or an obstacle to it.

The writer is the Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of PIDE