Textile industry is the backbone of Pakistan economy which constitutes more than 60% to total exports and providing jobs directly or indirectly millions of people. Export-oriented units (EOUs) must sell cheaply in the world market or face disaster. We’ve learned that one of the most impactful domestic forces on their cost structure and cash flow is Sales Tax Regulations.
In this blog, we will walk you through the existing Sales Tax Rules, decode sales tax basics as applicable to exporters, analyze major sections of the FBR Sales Tax Act and cover important updates made under the Sales Tax Regulations 2025 that textile exporters should not miss.
Sales Tax Basics
In essence, Sales Tax is a Value Added Tax (VAT) that is imposed under the Sales Tax Act, 1990 by the Federal Board of Revenue (FBR). The standard rate is 17%, however the textile export sector benefits from a special zero-rating regime, once under the Fifth Schedule and now predominantly under the Export-Oriented Sectors (Zero-Rating) Rules as inserted by SRO 209(I)/2024 and amended from time to time.
In simple terms:
- Supplies to registered exporters local (spinning to ready fabric) are fully zero rated.
- Exporters claim zero-rating on their exports under Section 5 to read with Fifth Schedule, or the new EOU system.
- Refund of input tax paid on purchase of raw material, utilities and machinery etc.
Sales Tax Regulations 2025
The most significant change in the recent Sales Tax Regulations of Pakistan has occurred through Finance Act 2024, coupled with several SROs towards the end of 2024 and at the beginning of 2025. The concessional zero rating on local supplies of five export sectors (textile, leather, carpets, surgical and sports goods) under SRO 1125(I)/2011 was withdrawn with effect from 1st July 2024.
Instead, the government initiated a fresh scheme, Export Facilitation Scheme 2025, and a faster refund regime, known as FASTER-Plus, while also introducing special Sales Tax Rules for units registered under Export-Oriented Units.
Some of the salient features relating to Sales Tax Regulations for 2025 for textile EOU are:
Mandatory EOU Registration
All export-based zero-rated entities should now be registered in the Export Facilitation Scheme 2021 (updated till 2025) of the FBR and concerned Export Development Authorities.
17% Sales Tax on Local Supplies
Local supplies to EOUs are now being charged 17% sales tax as opposed to being zero-rated. But input tax is fully recoverable/ refundable via FASTER-Plus system within 72 hours (in most cases).
Deferral of Payment of Sales Tax on Imports
EOUs would be allowed to import raw material and machinery under DTRE (Duty and Tax Remission for Exports) or the new EFS without payment of sales tax on the condition that bank guarantees/pay-orders are provided.
Consumption-Based Minimum Tax
EOUs must pay a minimum value-addition tax of 2–3% on export proceeds if their input tax adjustment is overly excessive to output (a measure to curb fake/flying invoices).
Impact on Textile Exporters
Positive Impacts
- The average refund time has been cut down to just under a week, compared with 6‒9 months prior to FASTER-Plus which led to quicker refunds.
- This makes it easier to manage the operating capital through deferred payment on imports.
- Sincere exporters with appropriate documents are getting recovery of their inputs in almost real-time.
Negative Impacts and Challenges
- Cash Flow Crunch:Regardless of whether refunds are rapid, the imposition of 17% up front on local purchases ties up billions in working capital for large mills.
- Heavier Compliance Load:EOU registration, e-invoicing, and monthly consumption ratios need strong ERP.
- Vulnerability of audit and penalties in case input output ratios are raised by the FBR’s AI-based risk engine.
- Small and medium exporters that do not have robust finance teams are finding the change challenging.
What Textile Export-Oriented Units Should Do?
- You should register under Export Facilitation Scheme 2025 (EOU) at the earliest.
- Connect your ERP with FBR’s Digital Invoice Portal.
- Keep proper records of production and consumption activity to prevent little value-addition tax.
- Annex-H Monthly without fail (including nil) to remain eligible for FASTER-Plus.
- If you are a commercial exporter, or Tier-2/3 manufacturer, you may want to have a look at participating in an indirect export scheme.
Conclusion
Even as the government targets to clamp misuse of zero-rating regime and broaden the tax base, real textile export-oriented units are now under higher compliance costs and temporary liquidity stress. Anyone who does not quickly adapt to the digital and EOU world will come under increasing pressure of competition.
Never has it been more important for Pakistan’s textile industry to be up to date with FBR Sales Tax Act changes, notices and circulars.