APTMA Urges Govt to Rethink Regressive Tax Measures Against Textile Sector

The All Pakistan Textile Mills Association (APTMA) has voiced serious concerns regarding the “regressive and punitive” tax and customs-related measures proposed in the Finance Bill 2024 which it said pose an existential threat to Pakistan’s textile industry.

In a statement, APTMA said that the textile sector contributes over 50 percent of total export earnings and employs 40 percent of the industrial labor force. The proposed measures will destroy this vital sector, causing irreparable harm to Pakistan’s economic stability and export capacity.

Withdrawal of Zero-Rating on Local Inputs for Export Manufacturing

The withdrawal of zero-rating on local inputs for exports (through EFS) will significantly disadvantage domestic producers of intermediate goods like yarn and cloth. This regressive measure will reduce domestic value addition in exports, as exporters will favor duty-free and sales-tax-free imported inputs over expensive local ones, undermining the competitiveness of domestic manufacturers.

Additional Customs Duty on Cotton and High-Performance MMF

Imposing a 2 percent customs duty on cotton and high-performance man-made fibers (MMF) will severely impact the SME sector, including domestic yarn and cloth manufacturing. This measure will favor foreign suppliers over local manufacturers, leading to increased costs for domestic production and further stagnation in domestic cotton productivity. The textile industry, consuming 14-16 million bales of cotton annually, will suffer greatly as reduced domestic cultivation exacerbates the existing shortfall, necessitating higher imports.

Advance Tax on Export Proceeds/Income Tax on Exporters

The proposed 2 percent advance tax on turnover, adjustable against a 29 percent tax on income (effectively 39 percent after super tax), will deplete liquidity and profitability in low-margin, high-volume businesses like textiles. This excessive tax burden, coupled with high operational costs, will erode the competitiveness of Pakistani exporters, driving customers to countries with more favorable tax policies.

No Allocation of Funds to Address Industry Liquidity

The Finance Bill 2024 fails to address the liquidity crisis in the textile sector, where firms are on the brink of bankruptcy due to high borrowing and operational costs. The government’s failure to release outstanding dues under various refund regimes has exacerbated this crisis. Immediate allocation of funds to clear these dues is essential to prevent further insolvency and support industry liquidity.

Failure to Rationalize Duties on PTA/PSF

The high import duties on critical raw materials like PTA and PSF make local production significantly more expensive compared to international competitors. The 5 percent import duty on PTA benefits only a single outdated PTA plant, hampering the entire sector’s export growth and diversification. Rationalizing these duties is crucial to enhance the competitiveness of the textile industry.

APTMA said exporters are being unjustly marginalized and treated like pariahs, even worse than domestically oriented industries, which is pure discrimination. Pakistani manufacturers are already operating at a severe competitive disadvantage due to the highest tax rates, energy prices and other operational costs in the region. Countries like Bangladesh, India, and Vietnam offer significantly more favorable tax environments, incentivizing investment and growth in their textile sectors.

For instance, Bangladesh provides a 10-year tax holiday for new textile firms, and Vietnam offers preferential tax rates of 10-15 percent for firms in priority sectors. In stark contrast, Pakistani textile firms face an effective tax rate of 39 percent after considering the super tax. These enormous disparities have already driven many investors away from Pakistan, stalling growth and leading to further deindustrialization.

The proposed measures in the Finance Bill 2024 will exacerbate this situation by imposing additional financial burdens on an already struggling sector, as outlined above. The overall impact on the economy will be devastating. The textile sector, which accounts for over 50 percent of Pakistan’s total export earnings, is a critical source of foreign exchange and a major employer of millions across the country.

The collapse of this sector would lead to massive job losses, further exacerbating the already high unemployment rates. The reduction in export earnings would widen the trade deficit, putting additional pressure on the country’s foreign exchange reserves and increasing the risk of a balance of payments crisis.

Moreover, the proposed measures will halt new investment in productive export-oriented activities, leading to a further decline in industrial capacity. The flight of capital from the formal, documented sector to the informal sector will increase, reducing government revenue and worsening the fiscal deficit. This will create a vicious cycle of economic decline, with reduced growth prospects and a heightened risk of sovereign default on both domestic and foreign debt obligations.

In summary, the Finance Bill 2024, in its current form, not only fails to address the existing disadvantages faced by Pakistani manufacturers but actively worsens them. It protects foreign suppliers at the expense of local industry, undermines the competitiveness of Pakistani exports, and threatens the overall economic stability of the country.

APTMA has called for urgent reconsideration of these destructive measures to prevent a complete collapse of the textile sector and to safeguard Pakistan’s economic future.