Withdrawal of zero-rating on EFS imports key to protecting local textile industry
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In this picture taken on July 20, 2023, a worker operates a machine preparing fabric at the Kohinoor Textile Mills in Lahore. — AFP
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ISLAMABAD: While restoring zero ratings on local supply under the Export Facility Scheme (EFS), the International Monetary Fund (IMF) is unlikely to do with Pakistan’s current promises, which will be the only IMF program to eliminate zero rating on imports under the same scheme.
Under the EFS, the zero rating on local supplies was introduced as part of a wide range of financial stability efforts in the fiscal year 25 budgets, which aims to eliminate tax exemptions and privileges. The move was likely with the IMF in advance of the expansion Fund Facility (EFF) in 2024. According to a memorandum of economic and financial policies (MEFP) presented to the IMF on September 11, 2024, the financial year represents an important first step towards structural financial reforms, targeting the basic addition of Rs 1,177 billion (1.0 % of GDP). The budget was approved on June 28, 2024.
The purpose of the financial project is to raise Rs 1,723 billion in federal income, which has been largely increased by the General Sales Tax (GST) reforms. The government has pledged to increase GST revenue by Rs 286 billion by standardizing the rate in most goods. The low rate of 5 % and 10 % is now limited to some educational, health care and agricultural inputs. Exemptions are only for essential food and health items, acquisition of charity hospitals (except donations from private sources), textbooks, petroleum products, fertilizers and pesticides as well as for international and bilateral contracts.
The government has also confirmed the elimination of the exporter facility scheme, in which the exporters need to use the standard input tax credit mechanism to re -claim the VAT locally obtained on the inputs. The IMF’s October 2024 staff report, which has been released after the approval of the EFF, has emphasized the importance of the fiscal year 25 budgets and its revenue measures, noting that sales tax, income tax, and corporate tax structure reforms are especially important when they are required to increase taxes.
Given the GDP ratio of Pakistan’s low tax, these efforts are primarily viewed. The IMF has emphasized the need for continuous reforms to expand the tax base, including provincial agricultural income tax, tax exemption and improvement in concessions and tax administration. These changes are essential to achieving the necessary financial stability.
The EFF’s theme is the return of a preferential tax treatment. The first continuous structural standard under the program clearly prohibits introducing new tax forgiveness or preferential tax treatment, including exemptions, zero ratings, tax credit, rapid depression or special rates. The benchmark was completed during the first review of the program. In its latest MEFP submitted on April 24, 2025, the government confirmed its commitment not to issue any such concession through the Federal Budget or Legal Regulatory Orders (SROs).
The IMF’s April 2025 staff report warned against policy backing, which notes the risks posed by pressure to introduce concessions for politically affiliated interests. In this context, the decision to withdraw the zero rating on the local supply under the EFS reflects the government’s strong commitment to eliminate the priority behavior. In view of the repeated assurance of the IMF through structural standards and forming this approach, the possibility of re -introduction of zero ratings to local supplies is very low.
However, under the EFS, zero ratings on imports are implemented and an important policy stands as a distortion. Imports This is a loss for domestic manufacturers, while denying it for locally manufactured inputs. This dissatisfaction has been acknowledged in talks with the IMF. Removal of zero ratings on EFS imports will be compatible with extensive efforts to eliminate waiver and create a level playground for the local industry, especially for textile producers who have been badly affected.
Importing zero ratings distort the input selection for exporters, weakens domestic price chains and leaves the door open for misuse. EFS has historically been sensitive to leakage, and maintaining these privileges disrupts the credibility of broader reforms. In light of this, the removal of zero ratings on EFS imports is not only in line with the program’s goals but also represents an important move to support the local industry and ensure fair competition.
