In periods of fiscal stress, states often confront a choice: either reform the structure of revenue generation or intensify extraction from the most organised segments of the economy. Pakistan’s Revenuecracy has chosen the latter. With effect from 1 July 2024, goods export taxation has shifted decisively from facilitating growth to maximising upfront collection. The result is a troubling inversion of priorities—revenue collection thriving at the expense of export growth.

At a time when the country desperately needs foreign exchange stability and industrial expansion, tax policy is increasingly structured in a manner that extracts liquidity from exporters of goods rather than enabling their progression. The worst sufferers are value-added exporters of goods who historically (1996 to 2024) were subjected to taxation on a gross export proceeds basis.

Value-added textile exporters, the backbone of Pakistan’s foreign exchange earnings, now operate under a confiscatory tax regime that collects income before it is earned and retains liquidity long after it is due for refund. What was once a final and predictable tax arrangement has been replaced by layered advance tax extraction, resulting in the accumulation of refunds.

Large manufacturing exporting companies, with effect from tax year 2025, having income exceeding Rs. 500 million, are subjected to income taxation of 29 per cent, super tax of 10 per cent, and withholding of one per cent of export proceeds under section 154, treated as minimum tax, plus one per cent advance tax under section 147(6C) of the Income Tax Ordinance, 2001.

The consequences are already visible. During the first seven months of the current fiscal year (July 2025 to January 2026), exporters paid approximately Rs. 101 billion—matching collections in the same period last year despite the absence of comparable export growth. This is not evidence of rising profitability but of intensified pre-collection.

What is happening is that revenue extraction has accelerated faster than export expansion. Thus, the state is no longer taxing growth but extorting taxes in advance as well as at the time of filing tax returns, thereby retarding the export growth that the government wants to enhance on paper.

Pakistan’s fiscal crisis has produced many distortions, but few are as consequential as the quiet transformation underway in the taxation of value-added exports of goods. While economic debate frequently revolves around declining exports, shrinking industrial investment and persistent external vulnerability, much less attention is paid to the disastrous transformation within the country’s tax system—one that increasingly treats exporters not as engines of growth but as instruments of advanced revenue collection.

Parliament, at the behest of Revenuecracy, not only committed a constitutional violation but also destroyed growth in exports of goods

Parliament, at the behest of Revenuecracy, not only committed a constitutional violation but also destroyed growth in exports of goods

The shift began formally with the Finance Act 2024 by dismantling the Final Tax Regime (FTR) for exporters of goods and converting withholding tax into the minimum tax regime (MTR), in addition to the application of the normal tax regime (NTR). It has done something far more consequential than revising income tax rates.

Parliament, at the behest of Revenuecracy, not only committed a constitutional violation but also destroyed growth in exports of goods. The shift to NTR/MTR, combined with the withdrawal of sales tax zero-rating on local inputs under the Export Facilitation Scheme (EFS), has proved to be the worst example of fiscal overreach, causing substantial economic self-harm.

Pakistan’s exporters were not seeking subsidies. They were seeking predictability and compatible energy tariffs. What they have received instead is uncertainty and extremely high taxes. From tax years 2003 to 2024, section 154 read with section 169 of the Income Tax Ordinance, 2001, ensured that a 1 per cent tax deduction on export proceeds constituted a full and final discharge of tax liability, with no deduction, allowance, credit, or refund permissibility. The State, through FTR, assured revenue upfront and exporters' certainty.

The FTR was not an ideal regime, but it offered confidence and consistency—crucial ingredients in export-oriented manufacturing, where margins are narrow and global competition unforgiving. On the contrary, the new aggressive, rather unconstitutional, taxation has created uncertainty and refund dependency, as the entire goods export supply chain is governed by multi-layered advance taxation and 18 per cent sales tax.

Subsection (6C) of section 147 of the Income Tax Ordinance, 2001, states:

“Notwithstanding anything contained in this Ordinance, the persons specified in sub-sections (1), (3), (3A), (3B) and (3C) of section 154 shall, at the time of realisation of foreign exchange proceeds, or realisation of the proceeds on account of sale of goods, or export of goods, or at the time of making payment to an indirect exporter, or clearing of goods exported, respectively, deduct or collect, as the case may be, advance income tax under this section at the rate of one per cent of such foreign exchange proceeds, or export proceeds, or exports, or payment, in addition to tax collectable or deductible under section 154 of this Ordinance”.

The language is unequivocal. Exporters suffer one per cent withholding on export proceeds under section 154 of the Income Tax Ordinance, 2001, and must simultaneously pay an additional one per cent advance income tax under the above section—expressly “notwithstanding anything contained” elsewhere in the law and explicitly “in addition to” existing taxation. Tax is thus collected multiple times before income is even determined. Adding insult to injury, tax withheld at source is a minimum tax and not refundable, even if there is a bona fide loss.

At the time of filing income tax returns, large export-oriented manufacturing companies are exposed to the standard income tax rate of 29 per cent, minimum tax on turnover under section 113, and alternate corporate tax under section 113C of the Income Tax Ordinance, 2001. On top of this, super tax under section 4C—ranging between one and ten per cent depending on income thresholds—may apply. Additional levies such as Workers’ Welfare Fund (WWF), Workers’ Profit Participation Fund (WPPF), infrastructure cess, and other statutory charges (EOBI, social security, etc.) further increase the overall burden.

When the state begins treating exporters as instruments of advance financing rather than engines of growth, the cost is not merely economic—it is structural

When the state begins treating exporters as instruments of advance financing rather than engines of growth, the cost is not merely economic—it is structural

The constitutional dimension of the above taxation deserves scrutiny. Entry 47, Part I of the Federal Legislative List, Fourth Schedule to the Constitution, authorises taxation of income—meaning real profits determined after deduction of expenses. Entry 52 permits taxation based on production capacity, but only instead of income taxation.

The Supreme Court, in the Elahi Cotton Mills case, enunciated that these constitutional entries operate as alternative legislative choices, not cumulative instruments. Yet the present framework compels exporters to pay tax on turnover regardless of profitability, while simultaneously subjecting the same income to corporate taxation and super tax. In substance, exporters are exposed to concurrent income taxation and capacity-based extraction—a hybrid levy that violates constitutional boundaries.

The discrimination embedded in policy design compounds the problem. Exports of services continue to operate under final taxation arrangements. Software exporters, consultants, and IT service providers discharge liability through final withholding mechanisms, enjoying predictability and minimal refund exposure. Manufacturing exporters generating millions of jobs and substantial domestic value addition face audits, minimum taxation, layered advance recovery, and refund dependence.

The cumulative burden confronting value-added textile exporters is confiscatory. Financing costs arising from refund delays compound the burden. Compliance risk and audit exposure generate additional expense. When all taxes, infrastructure cess, and workers’ welfare levies are aggregated, effective fiscal extraction approaches levels that absorb the overwhelming share of profits.

A simple survival analysis illustrates the outcome: from every Rs. 100 of taxable operating profit, barely Rs. 13 remains available for reinvestment after statutory obligations and liquidity costs are accounted for. Industrial expansion cannot occur under such arithmetic.

In low-margin sectors such as value-added textiles, where operating margins typically range between five and eight per cent, repeated pre-collection inevitably exceeds final liability. The excess becomes refund claims. Outstanding refund stock—income tax and sales tax combined—now exceeds well over Rs. 300 billion. Headline collections of FBR may appear robust, but working capital is fast draining from the industry. Economically, exporters are financing the state.

This is particularly troubling because value-added textiles remain Pakistan’s most viable export growth engine. Knitwear and ready-made garments continue to perform despite structural headwinds. The textile value chain accounts for nearly sixty per cent of national exports and supports millions of livelihoods across supply networks extending from cotton ginning to logistics and packaging. Few sectors possess comparable employment intensity or foreign exchange reliability.

International competitors understand this dynamic clearly. Bangladesh maintains reduced taxation for export industries and a rapid VAT refund system. Vietnam aligns corporate tax incentives with industrial zone development. India’s automated GST refund architecture ensures liquidity neutrality. Pakistan, by contrast, collects first and reconciles later.

The resulting fiscal illusion is subtle but significant. Advance collections inflate revenue figures in the current year while refund liabilities accumulate silently. Gross collection rises, whereas net realisation remains contingent. The treasury appears strengthened even as industry liquidity weakens. In a country where export expansion is essential for macroeconomic stabilisation, such a policy orientation is counterintuitive.

The deeper issue lies within the fiscal philosophy of the government. Increasing reliance on withholding and advance taxation reflects administrative expediency during periods of fiscal stress. Documented sectors become convenient revenue stabilisers and victims of administrative high-handedness.

However, exporters are not captive domestic consumers. They operate in competitive global markets where costs cannot simply be passed on. When taxation absorbs nearly the entire surplus, investment freezes first. Capacity expansion is completely diminished. Market share eventually migrates. Pakistan’s challenge is not the absence of entrepreneurial capability, skilled workforce, or capital in export manufacturing. It is the gradual erosion of the enabling environment required to sustain and expand.

Fiscal consolidation should remain a priority. However, sustainable revenue mobilisation depends on expanding productive sectors rather than compressing them. Export growth historically generates broader tax capacity through employment, consumption, and industrial linkages. Extractive taxation of value-added exporters may produce short-term inflows, but weakens the very base upon which long-term fiscal stability depends.

A rational recalibration is urgently required. Export taxation must restore predictability. Refund mechanisms must become automated and time-bound. Parity between goods and services exports must be ensured. Value-added textiles should be recognised as a preferred growth sector rather than treated as a convenient source of layered advance tax recovery. Absent such correction, Pakistan risks discouraging the industries capable of sustaining tax collections.

Taxation is a sovereign power. Used wisely, it finances development. Used injudiciously, it can undermine it. When the state begins treating exporters as instruments of advance financing rather than engines of growth, the cost is not merely economic—it is structural, which, once weakened, cannot be easily rebuilt.

© The Friday Times