The textile industry in Pakistan is a testament to the country’s resilience and adaptability in the face of global economic slowdown triggered by the increased production costs.
In 2021, the sector achieved a landmark, with textile exports reaching a record $19.9 billion, accounting for more than half of Pakistan’s total exports.
This milestone highlighted the industry’s critical role in the national economy and showcased its potential as a global player in the textile market.
However, the journey has been far from smooth. Amidst the global economic slowdown triggered by the increase in energy expenses, Pakistan’s industrial manufacturing sector has been adversely affected, mirroring the situation in other parts of the world.
The textile industry, which has been a crucial sector of Pakistan’s economy since its inception, contributing significantly to the country’s GDP, employment, and exports, faces additional challenges due to the country’s struggling economy and prolonged periods of political instability.
In 2024, Pakistan’s textile industry, once a cornerstone of the national economy, stands at a critical crossroads.
Once globally competitive, it now faces unprecedented challenges threatening its global standing. Meanwhile, Bangladesh, a major competitor in the textile sector, is grappling with a severe crisis, prompting international buyers to seek alternative suppliers. This presents a potential opportunity for Pakistan.
Textile industry is well-positioned to absorb Bangladesh’s displaced orders provided the government eases stifling policies.
Bangladesh’s textile industry, known for its low-cost garment production, has been hit by political instability, energy shortages, rising labour costs, and environmental challenges.
Global brands that once depended on Bangladesh are now searching for alternative suppliers. Unfortunately, Pakistan is unable to fill this gap due to its own set of challenges. High energy costs, heavy taxation, lack of technological investment, and supply chain disruptions have restricted the growth pace.
Global conditions are generally favourable for exports, with American and European brands shifting away from China and Myanmar.
This is the time to re-design export strategies to grab these huge export opportunities that will lead to economic prosperity for the country.
Resolving Pakistan’s energy crisis is crucial. Stable and affordable energy could be a game-changer for the industry as high energy costs are a significant burden, directly affecting the competitiveness of Pakistani textiles in the global market.
Power tariff has exceeded a critical threshold of over 14 cents/KWh, which is almost twice the average faced by competing economies like Vietnams, India, and Bangladesh.
Similarly, gas/RLNG tariff for industries has reached to $13.5 per mmbtu, which makes the industry unviable within the region.
Gas is the basic fuel for the export-oriented textile value chain.
However, gas supply to highly efficient captive co-generation power plants will be discontinued from January 1, 2025.
This move will hamper the industrial manufacturing leading to a large-scale industrial closure and massive unemployment.
Huge investments of billions of rupees will become sunk cost as additional investments will be required for grid connectivity.
DISCOs inability (outages/fluctuations) to maintain stable and consistent power will enormously damage the highly automated machines leading to heavy losses.
Large-scale manufacturing (LSM) units with power demands exceeding 10 MW per hour, will be required to install own grids, which is a time-consuming process that requires billions of rupees in investment.
Unwarranted delay in payment of outstanding refunds is inflicting a severe strain on the highest growth-oriented and employment providing textile industry.
This poses a substantial financial burden on exporters as a significant portion of exporters’ working capital (more than Rs300 billion) remains trapped in the refund regime on account of Sales Tax, Income Tax, Duty Drawback etc, resulting in the burden of paying interest on outstanding refunds.
The advance income tax on exporters has doubled in the last federal budget, including 1pc minimum tax (advance under Section 154) and an additional 1pc advance tax under Section 147.
This has severely affected exporters’ cash flow.
Manufacturers involved in domestic textile trade pay only 1.25pc advance tax, while exporters bear a heavier burden. Since exporters already pay 29pc income tax on earnings, we recommend that individual exporters’ Q1FY25 reviewed accounts by the chartered accountants be analysed by FBR.
Exporters with low profitability whose tax liability is covered by Section 154, advance tax should be exempt from Section 147 advance tax.
The Sales Tax Act 1990 holds exporters responsible for the GST input across the entire supply chain.
This is both illogical and unfair, as exporters can only be accountable for their direct business partners and have no access to FBR systems to track the supply chain origin. Exporters are one of the most compliant sectors, providing detailed monthly disclosures under the sales tax regime.
The 12pc sales cap and Form H already provide a complete accounting of materials and finished products.
We request this anomaly be corrected, and that a regulatory framework be established to prevent harassment. In terms of subsection 7 of Section 3, a registered person can be made liable to withhold sales tax charged by his supplier on his supplies to the extent and manner prescribed in 11th schedule of the Sales Tax Act 1990.
The exporters maybe declared as withholding agent in terms of subsection 7 of Section 3 and extent of withholding against all of their purchases may be notified in the 11th schedule of the Act.
The EFS scheme was launched after thorough deliberation to document the export value chain and support export-oriented businesses.
However, the recent budget removed the scheme for domestic trade, despite being revenue-neutral (due to zero-rating of GST on exports).
This withdrawal has negatively impacted the textile value chain’s cash flow and is a major obstacle to achieving double-digit growth. Rationalising the scheme will help address these concerns.
Expanding export markets beyond traditional regions will reduce reliance on a few large buyers and tap into emerging markets in Africa and Latin America.
Pakistan’s textile industry is at a pivotal moment. While Bangladesh’s crisis has created an opening, Pakistan’s internal struggles have hindered the sector’s ability to capitalise on it.
However, with the right mix of investment, government support, and a focus on sustainability, Pakistan still has the potential to re-emerge as a global leader in textiles.
