Pakistan's textile sector crumbles as Govt stalls on EFS overhaul

May 20, 2025 (MLN): Pakistan's textile industry is rapidly deteriorating as, for over 10 months now, the government has failed to address the fatal anomaly in the Export Facilitation Scheme (EFS).

The result is a deeply distorted tax regime that has rendered domestic manufacturing uncompetitive, gutted local supply chains, and handed Pakistan's textile value chain over to foreign suppliers.

The Export Facilitation Scheme allows exporters to import raw materials and inputs at 0% sales tax but imposes 18% tax on the same inputs if they are made in Pakistan.

It's an irrational, self-destructive policy that punishes domestic production and rewards imports, according to the All Pakistan Textile Mills Association (APTMA).

While the sales tax is refundable, there are high time, administrative, and liquidity costs associated with refunds.

Sales tax is paid when an input is procured, and the claim for refunds can only be filed once the product has been manufactured and exported 6 to 10-month cycle at least.

Add to that the administrative costs associated with filing, follow-ups, and regular harassment by the FBR.

Then, there is the huge liquidity cost as capital becomes stuck in the sales tax regime during the 6–10-month production cycle.

Once claims are filed, even though Sales Tax Rules mandate refund issuance within 72 hours, only partial refunds of 60-70% are issued once a month.

The remaining amount is deferred for manual processing, where there is already a backlog of over Rs110 billion, and no progress on clearing it over the last 4-5 years.

As a result, exporters have switched to imported inputs. Monthly yarn imports are over twice the historic peak, expected to hit 300 million kg in FY25-nearly triple the 108m kg in FY24.

In total, imports of just three key raw materials- cotton, yarn, and greige fabric- are expected to be $1.5bn higher than last year.

 Meanwhile, exports are only projected to increase by $1.14bn. More dollars are flowing out of Pakistan than coming in.

The headline export figure is a facade; underneath, the industry is hollowing out. Over 800 ginning factories and 120 spinning mills have shut down, and millions of livelihoods lost.

The crisis has reached the weaving sector, with looms shutting down and workers protesting on the streets.

While the government chases headline numbers, it ignores that the value added in exports is increasingly foreign, and Pakistan is effectively exporting imported goods while local industry, jobs, and investment vanish.

The crisis is not just limited to the industry. The cotton season begins next month. Who will buy 10 million bales from farmers without a functional spinning industry?

Cotton output has already fallen from 15m bales in the mid-2010s to around 5- 10m today.

While commendable steps have been taken-such as lifting the cotton seed import ban and introducing modern farming techniques under the Green Pakistan Initiative single biggest obstacle to cotton revival remains the current sales tax regime.

Pakistani cotton is taxed at 18%, while imported cotton enjoys a sales tax-free path through EFS.

Even cottonseed and cottonseed cake-basic agricultural byproducts, face an 18% sales tax, a practice unheard of globally.

Given elastic demand, farmers must absorb the high tax burdens, pushing their incomes below the cost of production.

As the spinning sector primary consumer of cotton-has largely been deindustrialized by the EFS anomaly, demand for cotton has severely plummeted.

With uncertain demand and no support price, there is high uncertainty regarding the profitability of cotton, and farmers are shifting towards alternate, water-intensive crops with severe implications for Pakistan's already scarce water resources.

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