Govt Imposes 18% Sales Tax on Exporters: Implications for Pakistan's Economy

Introduction

In a move aimed at bolstering revenue and aligning with International Monetary Fund (IMF) directives, the Pakistani government has imposed an 18% sales tax on exporters. This policy, introduced in the 2025-26 budget, has triggered widespread concerns among stakeholders, especially those in the textile industry. This article offers a comprehensive breakdown of the rationale, reactions, and potential consequences for Pakistan’s economic landscape.

Background: The Rationale Behind the Tax

The 18% sales tax on exporters is part of a broader tax reform initiative aimed at achieving the government's ambitious revenue target of PKR 13 trillion, a 40% increase from the previous fiscal year. This move comes as part of structural reforms required by the IMF for continued financial support.

While the policy is designed to boost tax collection and reduce the fiscal deficit, it also reflects Pakistan's broader struggle to meet IMF benchmarks without compromising economic growth.

Industry Response: Concerns and Criticisms

Textile Sector's Reaction

The textile sector, which contributes nearly 60% of Pakistan’s total exports, has emerged as the most vocal opponent of the tax. The Value-Added Textile Exporters Forum has criticized the decision, arguing that it will increase bureaucratic interference, slow down refund processes, and create opportunities for corruption within the Federal Board of Revenue (FBR).

Previously, the textile sector operated under a simplified 1% final income tax system with minimal paperwork. Under the new regime, the manual documentation and refund claims process could lead to delays and exploitation.

Broader Export Community's Stance

The impact is not limited to textiles. The All Pakistan Fruit and Vegetable Exporters Association also rejected the tax, warning it could lead to a drastic fall in exports and result in layoffs and reduced international competitiveness.

Stakeholders across various industries argue that rather than supporting exporters, the policy adds uncertainty and financial pressure, especially during a time of currency volatility and global economic slowdown.

Economic Implications

Impact on Export Competitiveness

With countries like India and Bangladesh offering tax incentives and subsidies to boost exports, Pakistani exporters already operate at a disadvantage. Adding an 18% sales tax could significantly impact cost structures, making Pakistani goods less attractive globally.

This poses a threat to national foreign exchange reserves and widens the current account deficit. If not carefully managed, it could result in reduced demand, lost market share, and long-term economic stagnation.

For more context, read our detailed overview of Pakistan’s textile industry and how tax policies influence global trade competitiveness.

Potential for Reduced Export Volumes

Increased financial pressure on businesses could lead to production cutbacks and downsizing. Lower exports directly translate to reduced dollar inflows, hurting macroeconomic indicators like GDP growth, exchange rates, and employment levels.

Government's Position and Justification

Prime Minister Shahbaz Sharif defended the tax, citing its necessity for fiscal consolidation. According to Profit by Pakistan Today, the Prime Minister rejected proposals to exempt exporters from the tax, fearing negative feedback from the IMF that could endanger future bailouts.

Similarly, Bloom Pakistan reported that the Finance Ministry is under pressure to show commitment to IMF-backed reforms, despite their domestic unpopularity.

This fiscal approach reflects a tough balancing act between satisfying international lenders and sustaining local economic health.

Recommendations and Way Forward

To strike a balance between revenue generation and export growth, the following steps are crucial:

1. Gradual Implementation

Introducing the tax in phases can help businesses adjust operations and avoid sudden shocks.

2. Streamlined Refund System

Modernizing and digitizing the refund process within the Federal Board of Revenue (FBR) can prevent delays and corruption.

3. Active Stakeholder Dialogue

Ongoing consultation with key industry leaders can inform balanced policy adjustments. Visit our export strategy insights section for more recommendations.

4. Broaden Tax Base

Expanding tax collection beyond the export sector — through VAT compliance and better documentation in retail and real estate — could reduce dependency on export levies.

Conclusion

The new 18% sales tax on exporters is part of Pakistan’s broader effort to improve fiscal discipline and meet IMF expectations. However, it also presents serious challenges to exporters, especially those in sectors like textiles, fruits, and vegetables.

To avoid stifling economic growth, the government must consider phased implementation, digital solutions for refunds, and expanded dialogue with stakeholders. Only a balanced, inclusive approach can ensure both revenue generation and sustained export-led growth.