Islamabad: Pakistan’s textile industry is facing an unprecedented crisis due to a deeply flawed tax regime under the Export Facilitation Scheme (EFS), which has severely undermined domestic manufacturing and forced businesses to rely on costly imports. For over ten months, the government has failed to rectify this critical policy anomaly, leading to the near-collapse of local supply chains and massive job losses across the sector.  

Under the current EFS framework, exporters can import raw materials at 0% sales tax, while locally manufactured inputs are taxed at 18%. This irrational policy discourages domestic production, incentivizing imports despite the availability of homegrown alternatives. Although the sales tax is technically refundable, the lengthy and cumbersome refund process creates significant financial strain. Exporters must wait six to ten months to claim refunds, during which their capital remains locked in the system. Even then, only partial refunds of 60-70% are processed monthly, while the rest gets stuck in a backlog exceeding Rs. 110 billion—a problem unresolved for the past four to five years.  

The consequences have been devastating. Textile manufacturers, unable to compete with tax-free imports, have increasingly shifted to foreign suppliers. Yarn imports have surged to more than double their historic peak and are projected to reach 300 million kilograms in FY25—nearly triple last year’s volume. Combined imports of cotton, yarn, and greige fabric are expected to rise by $1.5 billion this year, far outpacing the $1.14 billion increase in exports. This imbalance means more dollars are leaving Pakistan than entering, further straining the economy. 

The All Pakistan Textile Mills Association (APTMA) warns that the apparent stability in export figures masks a rapidly deteriorating industry. Over 800 ginning factories and 120 spinning mills have shut down, displacing millions of workers. The crisis has now spread to the weaving sector, with widespread layoffs and protests by unemployed laborers. Rather than fostering genuine growth, Pakistan’s export economy is increasingly reliant on foreign inputs, eroding local value addition and pushing the domestic industry toward extinction. 

The fallout extends beyond textiles. With the cotton season set to begin next month, farmers face an uncertain future. Cotton production has already plummeted from 15 million bales a decade ago to just 5-10 million bales today. Despite government efforts to revive the sector—such as lifting the cottonseed import ban and promoting modern farming techniques—the 18% sales tax on local cotton remains a major obstacle. Unlike imported cotton, which enters duty-free under the EFS, Pakistani cotton farmers bear an unfair tax burden, driving many to switch to water-intensive alternative crops. This shift threatens Pakistan’s already scarce water resources and endangers millions of livelihoods, particularly women employed in cotton picking who lack alternative income sources.  

Despite repeated appeals from industry stakeholders, the government has taken no action to reform the EFS or restore zero-rating for local inputs. Immediate intervention is crucial to prevent total collapse. Experts urge the government to exclude yarn and fabric from the EFS import scheme, warning that no country can industrialize by dismantling its own supply chains in favor of imports.  

The time for indifference is over. If Pakistan’s textile and cotton sectors are allowed to fail, the economic and social consequences will be irreversible. The government must act now to save what remains of this critical industry before it is too late.