PBF Advocates for GST Exemption on Yarn and Fabric to Save Textile Industry

The Pakistan Business Forum (PBF) has urged the federal government to eliminate the 18% General Sales Tax (GST) on yarn and fabric in the upcoming Federal Budget 2025–26. The forum cautioned that failure to do so could lead to the total collapse of the nation’s textile sector.

Malik Talat Suhail, Chairman of PBF South Punjab, highlighted that the Export Finance Scheme (EFS), initially designed to phase out subsidies and boost exports, has instead negatively impacted the textile industry. Under the EFS, imported raw materials are exempt from both sales tax and customs duties, while locally sourced inputs are still subject to an 18% tax.

Although this tax is technically refundable, only 60–70% of these refunds are typically processed. The refund system suffers from prolonged delays, manual procedures, and substantial costs, which disproportionately affect small and medium-sized enterprises (SMEs).

Impact on Local Suppliers and Trade Imbalance

This disparity has incentivized exporters to opt for imported materials, severely harming local suppliers. Consequently, Pakistan’s imports of cotton, yarn, and greige fabric increased by $1.5 billion in FY 2025, rising from $2.19 billion to $3.64 billion. In comparison, textile exports increased by only $1.4 billion, and net textile exports are anticipated to fall from $14.0 billion to $13.6 billion. Over 120 spinning mills and more than 800 ginning factories have ceased operations, accompanied by increasing protests from loom workers in Faisalabad. SMEs are especially vulnerable, as they face multiple tax payments at each production stage and have limited access to cheaper imported alternatives, unlike larger corporations.

The present situation has intensified strain on the nation’s foreign exchange reserves, particularly with a threefold increase in commercial import licenses—from 800 to 2,400.

Decline in Local Cotton Production

Simultaneously, local cotton production has reached an all-time low of approximately 5 million bales, with projections indicating further declines. Due to inadequate governmental support and reduced demand, numerous farmers are shifting from cotton cultivation to crops that require more water, thereby increasing pressure on national water resources.

The PBF also warned that the cotton economy’s downturn is depriving rural areas of $2–3 billion in revenue, with women cotton-pickers being among the most severely affected. Pakistan is currently the only nation that levies an 18% sales tax on cottonseed and cotton feed, pushing farmer income below production costs and disproportionately impacting the poorest segments of society.

Increased joblessness and decreased rural earnings are further intensifying the economic crisis.

Potential Economic Losses and International Concerns

The Forum emphasized that if existing policies remain unchanged, Pakistan could potentially lose $4–6 billion in foreign exchange earnings. Instead, the country is increasingly dependent on costly foreign loans to offset growing import expenses, exacerbating the trade deficit, unemployment, and tax collection shortfalls. Global partners have also taken note of this trend.

The United States has suggested that it might impose a 29% tariff on all Pakistani exports unless Pakistan rectifies its trade imbalance. Although the US has offered to export up to 1.5 million bales of cotton and has invited a Pakistani trade delegation for discussions, the decline in local spinning capacity raises a crucial question: who will utilize the cotton if domestic mills continue to shut down?

The PBF South Punjab chief has implored the government to promptly remove cotton, yarn, and fabric from the current EFS policy, asserting that maintaining GST on local cotton while exempting imports under the EFS is essentially a “Pakistan-unfriendly policy”. It undermines domestic production, weakens the economy, and only benefits opportunistic importers. Without immediate reforms, the country risks a deepening economic crisis driven by flawed policy choices.