Tax Exemptions on Imports

Under EFS, exporters can import input goods required for manufacturing finished products without paying:

• Customs duty
• Federal excise duty (FED)
• Sales tax
• Withholding tax (WHT)

These exemptions reduce the upfront cost of acquiring raw materials, enhancing cash flow and lowering production expenses for exporters. This benefit particularly supports small and medium enterprises (SMEs), enabling them to remain competitive in global markets.

 Tax Obligations on Local Procurement

A notable shift under the revised EFS rules is the requirement for manufacturers-cum-exporters to pay sales tax on locally procured input goods. Previously, many exporters benefited from exemptions or rebates on local purchases. The reintroduction of sales tax on these transactions increases the cost of local raw materials, potentially offsetting some of the benefits gained from tax-free imports.

 Income Tax Payments and IMF Conditions

Exporters previously enjoyed income tax concessions as part of Pakistan’s export promotion policies. However, under pressure from the International Monetary Fund (IMF), these concessions are being phased out. Exporters are now required to pay regular income tax on their earnings, increasing their tax liability.

• This shift aligns with the IMF’s demand for broadening the tax base and removing sector-specific incentives.
• It could lead to higher tax collection but may also impact the profitability of export-driven businesses.

 Impact on Small and Medium Enterprises (SMEs)

The combination of sales tax on local inputs and the removal of income tax concessions could disproportionately affect SMEs:

• SMEs often rely on locally procured materials, making the sales tax requirement a significant additional cost.
• With tighter margins compared to larger exporters, increased income tax liabilities could strain their financial stability.

 Potential for Increased Compliance Costs

Exporters need to maintain precise records and documentation to claim exemptions and comply with new rules. This will lead to higher compliance costs, especially for businesses unfamiliar with the revised procedures.

Long-Term Revenue Implications for FBR

While the tax exemptions on imports under EFS might result in reduced tax collection in the short term, the increased focus on local sales tax and regular income tax payments is expected to boost FBR’s revenue in the long run.

• The elimination of special concessions is also in line with the government’s broader policy to create a uniform tax regime.