Pakistan’s federal government is considering a proposal to abolish the 1% advance tax on export proceeds in its upcoming budget, a move that could provide nearly Rs100 billion in relief to exporters as the country’s textile industry pushes for measures to restore competitiveness in global markets.
The proposal, currently under review by economic policymakers, is among the few export-sector incentives being actively considered ahead of the budget announcement. While exporters have sought broader reforms, government officials indicate that large-scale fiscal concessions remain unlikely due to revenue pressures and commitments tied to ongoing economic stabilization efforts.
The 1% advance tax is deducted from export proceeds at the time transactions are processed, regardless of whether a company ultimately earns a profit. Exporters have long argued that the tax places unnecessary pressure on cash flow and working capital, particularly when businesses are already grappling with high energy prices, delayed tax refunds and increasing financing costs.
According to industry estimates, exporters paid nearly Rs200 billion in excess advance income tax during fiscal years 2025 and 2026. If the tax is withdrawn, businesses could recover approximately half that amount in the form of immediate liquidity support.
Industry representatives welcomed the proposal but cautioned that it addresses only a small part of the challenges facing Pakistan’s export sector.
Pakistan’s textile industry, which contributes more than half of the country’s export earnings, has submitted a series of recommendations to the government ahead of the budget. These include restoring the Final Tax Regime (FTR), reducing industrial electricity and gas tariffs, clearing more than Rs327 billion in pending refunds, and reviving export support schemes that were discontinued in recent years.
Textile manufacturers argue that Pakistan has become one of the most expensive places in the region for export-oriented production. Industry data suggests exporters face an effective tax burden exceeding 68.27%, significantly higher than many competing textile-producing countries.
In comparison, corporate tax rates in Bangladesh range from approximately 22.5% to 27.5%, while Vietnam maintains a corporate tax rate of around 20%. India applies corporate tax rates generally ranging from 26% to 34%, depending on business structure and incentives.
Exporters argue that Pakistan’s challenge is not simply higher tax rates but a complex system involving multiple levies, advance taxes, withholding taxes and compliance requirements. The 1% advance tax has been a particular concern because it is collected before a company’s actual profitability is determined.
“Businesses are effectively taxed before earnings are calculated,” said a leading exporter. “At a time when margins are already under pressure, this directly impacts liquidity and investment capacity.”
Beyond taxation, energy costs remain one of the most pressing concerns for manufacturers.
Industrial electricity tariffs in Pakistan currently average around 11.5 US cents per kilowatt-hour, compared with approximately 6.3 cents in India, 8 cents in Vietnam, and around 5 cents in Uzbekistan. The gap is equally significant in natural gas pricing.
Pakistani industries pay around $13.5 per mmBtu for gas, nearly double the rates paid by manufacturers in India and Vietnam, where prices typically range between $6 and $7 per mmBtu. In Uzbekistan, gas costs are estimated at around $3 per mmBtu.
Industry leaders say these differences significantly increase production costs and reduce the ability of Pakistani exporters to compete in global apparel and textile markets where buyers are highly price-sensitive.
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The sector also points to energy supply reliability as a critical issue. While countries such as China and Vietnam offer stable power and gas supplies to industrial users, Pakistani manufacturers continue to face uncertainty related to supply interruptions and fluctuating costs.
Another longstanding concern is the country’s tax refund system.
Pakistan applies a uniform 18% General Sales Tax (GST) on many inputs and finished goods. Although exporters are entitled to refunds, industry groups say payments are often delayed for months and, in some cases, years. These delays tie up substantial amounts of working capital that could otherwise be invested in production expansion, technology upgrades and workforce development.
The textile industry estimates that more than Rs327 billion in refunds remain pending, creating additional financial strain across the sector.
By comparison, competing export economies have adopted more efficient refund mechanisms. Bangladesh provides reduced or zero-rated VAT treatment for many export inputs, while India’s GST refund system generally processes claims within two to four weeks. Vietnam and China have also introduced highly automated refund systems that significantly reduce waiting times.
Despite the industry’s demands, officials familiar with budget discussions suggest that most major requests are unlikely to be approved this year. Pakistan remains focused on meeting revenue targets and maintaining fiscal discipline under broader economic reform programmes.
As a result, the proposed elimination of the 1% advance tax may emerge as one of the few direct concessions offered to exporters in the upcoming budget.
For the textile sector, however, the debate extends beyond a single tax measure. Manufacturers argue that long-term export growth will require a comprehensive strategy addressing taxation, energy pricing, refund efficiency, infrastructure and industrial competitiveness.
With global apparel sourcing becoming increasingly competitive and regional rivals continuing to attract investment through lower costs and streamlined policies, industry leaders warn that incremental measures alone may not be enough.
As Pakistan finalizes its federal budget, exporters will be watching closely to see whether policymakers are prepared to implement broader reforms that can strengthen the country’s position in international textile and apparel markets while supporting much-needed export-led economic growth.
