Dr. Ikramul Haq
“If we were to construe Entry 52 of the Legislative List keeping in view the above meanings of the expression “in lieu of”, it becomes evident that the Legislature has the option instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax”—Supreme Court in Messers Elahi Cotton Mills & others v Federation of Pakistan & others [PLD 1997 Supreme Court 582]
The Finance Act 2024 by dismantling Final Tax Regime (FTR) for exporters of goods and converting withholding tax into minimum tax regime (MTR) in addition to application of normal tax regime (NTR) has done something far more consequential than revising income tax rates. It has not only committed constitutional violation, but also destroyed exports of goods. The shift to NTR/MTR, combined with the withdrawal of sales tax zero-rating on local inputs under the Export Facilitation Scheme (EFS), has proved to be the worst example of fiscal overreach, causing substantial economic self-harm.
Pakistan’s exporters were not seeking subsidies. They were seeking predictability. What they have received instead is uncertainty and extremely high taxes. From tax year 2003 to tax year 2024, Section 169 of the Income Tax Ordinance, 2001 ensured that 1% tax deducted on export proceeds constituted full and final discharge of tax liability, with no deduction, allowance, credit and refund permissible. The State through FTR assured of revenue upfront and exporters of certainty.
Under the existing law, income from export of goods is included in total income and taxed at normal income tax rates with the condition that 2% tax, withheld under Section 154 of the Income Tax Ordinance, 2001 constitutes minimum tax. This is the gross violation of supreme law of the land—Constitution of Islamic Republic of Pakistan [“the Constitution”] as per dictum laid down in Elahi Cotton case. It amounts, in pith and substance, to invoking both Entry 47 (tax on income) and Entry 52 (capacity-based taxation) in respect of the same taxable base—a course expressly disallowed by the Supreme Court in Elahi Cotton Mills acse. Under NTR, the simultaneous application of MTR is patently unconstitutional.
One of the most glaring inconsistencies in the post-Finance Act 2024 framework is that while exports of goods have been pushed out of FTR, subjected to NTR and MTR simultaneously, exports of services continue to enjoy FTR. This differential treatment has no principled economic or constitutional justification. Both goods and services generate foreign exchange. Both operate in competitive global markets.
The policy folly by Federal Board of Revenue (FBR) has produced disaster results for exporters of goods, especially value-added manufacturing exporters—particularly in textiles. They now face exposure to 29% corporate tax, super tax under Section 4C, and refund-dependent compliance, whereas service exporters retain the certainty of final discharge through FTR.
When policy discriminates against manufacturing exports in favour of services, it not only distorts investment incentives, but also weakens domestic value chains, employment generation, and long-term industrial depth. Export policy cannot be selectively liberal for services and simultaneously punitive for goods without undermining the coherence of national trade strategy.
The discrimination becomes even starker when one examines the numbers. Take the case of one of the largest value-adding textile exporters in the country, with annual exports of roughly US$700 million. Once income tax at 29%, super tax 10%, WWF, WPPF, infrastructure tax and related imposts are aggregated, the effective fiscal burden reaches approximately 60% of taxable profits. In such circumstances, how can policymakers realistically expect reinvestment, technological upgrading, or capacity expansion? Expansion requires retained surplus. When policy absorbs the bulk of that surplus, growth becomes a rhetorical aspiration rather than an economic possibility.
The Pakistan Business Council (PBC), in its letter dated June 20, 2024 to the FBR Anomaly Committees, warned that the change from FTR to NTR would make Pakistani exporters “more than 3 times” worse off compared to Bangladesh and more than “2 times” worse off compared to Vietnam and Egypt. The FBR as usual shifted the blame on the International Monetary Fund (IMF) while rejecting the plea of PBC and all others, opposing the withdrawal of FTR for exporters.
Resultantly, since July 1, 2024 the simple 1% tax on export proceeds has been doubled and turned into minimum tax in addition to taxation under normal rates giving free hand to taxation officers to resort to audit and other harassment tools to extract more and more advance tax from big corporate exporters. Adding insult to injury, for refunds they are at the mercy of bureaucratic delays vulnerable to rent-seeking behaviour.
In a world of intense global competition, goods exporters had been managing to neutralize through relative advantage—simplified export taxation—while retaining enormous energy costs, higher interest rates, open and hidden levies, extortions by host of government departments, and infrastructure bottlenecks. The excessive and constitutionally questionable income tax under FTR/MTR has resulted in closing down of many units leading to rising unemployment and poverty.
As if this were not enough, the withdrawal of zero-rating on local inputs under EFS compounds the damage. The PBC explicitly warned that removing zero-rating on local inputs would “create a disparity between imports (which will continue to benefit from EFS) and local production”. In simple terms, imported inputs remain free of sales tax while locally sourced inputs bear 18% upfront GST subject to refund.
The Council also criticized the limitation of faster-based sales tax refund processing to only five erstwhile export-oriented sectors, describing the move away from technology and toward manual verification as “beyond comprehension and an apparent anomaly”. Exporters of goods are, thus, squeezed from both ends: income tax uncertainty and GST liquidity blockage. Even more telling is PBC’s objection to minimum turnover tax. It stated clearly that collection of minimum turnover tax despite losses incurred by the taxpayer is “beyond comprehension and unfair”.
The PBC was not alone in its criticism. Textile associations have publicly warned that the shift from FTR to NTR would discourage formal documentation and push smaller exporters into informality. Chambers of commerce across Karachi, Lahore, and Faisalabad have highlighted the cash flow crisis triggered by refund delays. The Federation of Pakistan Chambers of Commerce & Industry (FPCCI) repeatedly stressed that liquidity constraints—not nominal tax rates—are the real impediment to export growth.
In addition, business groups have expressed concern that the withdrawal of the Commissioner’s power to issue exemption certificates in genuine cases—another anomaly flagged by PBC—will remove flexibility from a system already plagued by rigidity.
Since 2024, what has emerged in export of goods sector is not isolated grievance but systemic disquiet. In these columns, it has been repeatedly highlighted that Pakistan’s fiscal structure has fully drifted toward “withholdingisation”—a phenomenon where withholding tax expands beyond pre-collection into a structural mode of extraction embedded at every transactional node. Instead of strengthening assessment capacity, documentation, and audit integrity, the State multiplies withholding provisions.
Unfortunately, the withdrawal of FTR for exporters of goods does not reverse withholdingisation; it deepens it. Withholding remains. What disappears is finality. Exporters are forced to pay upfront and then litigate, reconcile, and pursue refunds. In a low-margin export environment, liquidity is oxygen. Remove oxygen, and the organism suffocates.
Our competitors understand this. India ensures timely GST refunds. Bangladesh provides duty-free access and cash incentives. Vietnam integrates tax policy with trade agreements. China deploys VAT rebates strategically. Pakistan, meanwhile, increases upfront taxation while maintaining refund opacity. This reflects a deeper political economy pattern.
Pakistan operates under chronic fiscal stress. Expenditures exceed revenues. Instead of structural reform—broadening the base, reducing exemptions for powerful sectors, digitizing enforcement—the State repeatedly opts for expedient extraction from the relatively compliant segments of the economy. Exporters, by virtue of documentation and traceability, are easy targets. However, easy targets are not inexhaustible ones.
Export-led growth is not a slogan; it is a macroeconomic necessity. External debt sustainability, exchange rate stability, and industrial employment depend upon it. When export policy turns inward and punitive, it undermines the very foundation of fiscal recovery. Investors—domestic and foreign—seek predictability. A regime that oscillates between final tax, normal tax and minimum tax, between zero-rating and withdrawal, between automation and manual verification, signals instability.
The way forward is neither ideological nor radical. First, restore certainty in export taxation. Whether through a calibrated FTR with anti-abuse safeguards or a genuinely income-based regime that respects net profitability, clarity is essential. Second, ensure parity between local and imported inputs. Penalizing domestic value chains to satisfy short-term revenue targets is self-defeating.
Third, implement fully automated, time-bound refund mechanisms. Refund delay is not a technical glitch; it is an economic tax. Fourth, revisit minimum turnover tax provisions. Taxation despite losses is economically corrosive and constitutionally questionable.
Taxation is indeed an attribute of sovereignty. However, sovereignty exercised without constitutional restraint and economic foresight can erode itself. The Finance Act 2024 might have increased immediate collections. Nevertheless, the exports of goods since then have declined substantially. If imprudent policy towards bona fide exporters of goods continues, value chains will keep on shrinking and formal businesses remain on retreat, proving the so-called revenue gains illusory. A nation cannot tax its way to competitiveness. It must compete its way to prosperity.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.