Import Tax for Cotton Products: Possible 18% Duty on Imports?
The Pakistani Federal Government imposed an 18% sales tax on imported cotton fibre, yarn, and greige cloth in July 2025, aiming to protect and revive the domestic cotton industry and ensure fair competition between local and imported inputs.
The tax measure was a fulfilment of the commitment made in the Federal Budget 2025-26 and followed strong lobbying by the All Pakistan Textile Mills Association (APTMA). The association had argued that unrestricted imports without equivalent taxation were damaging local producers and farmers.
Key reasons for imposing the tax include equalizing tax treatment, reviving the domestic cotton market, and supporting textile export growth. The government aimed to level the playing field by imposing the same 18% sales tax on imported cotton inputs as on locally produced ones, thereby discouraging cheap imports that undercut domestic production.
The tax was meant to revive demand for local cotton by reducing the price advantage of imports. With domestic cotton production at historic lows and large volumes of cotton and yarn being imported tax-free or at lower tax rates, local farmers and ginners suffered, leading to unsold cotton stockpiles. The tax was intended to strengthen the local industry's input supply chain to produce more competitive exports.
The textile sector, which accounts for over 50% of Pakistan's total exports, showed robust growth with a $1.5 billion increase in FY 2024-25. However, the sector also saw a $1.5-$2 billion rise in imports, resulting in a net negative effect on the balance of payments.
Industry bodies like APTMA and Pakistan Business Forum viewed the tax as a positive step to stabilize the domestic cotton market and incentivize local production. However, prior to the implementation of the sales tax, the industry's reliance on imports had significantly increased, with imports of cotton and yarn hitting $4.24 billion and exceeding domestic production for the first time in history during fiscal 2025.
The tax aimed to correct these distortions, but the exclusion of imports from the Export Facilitation Scheme meant that imported inputs were still partially subsidized for exports. This balance was necessary to maintain export competitiveness while protecting the local industry.
The delay in implementing the sales tax may have negatively impacted the demand for locally grown cotton and domestically produced yarn and greige cloth. The tax was originally meant to take effect on July 15, but the delay coincided with the arrival of Pakistan's new cotton crop, which was facing a lack of buyers due to market uncertainty.
The APTMA initially sought complete exclusion of cotton fibre, yarn, and greige cloth imports from the Export Facilitation Scheme (EFS). However, the Federal Cabinet has approved the Finance Ministry's summary to fulfil the commitment made to APTMA, and these imports will remain under the EFS.
In conclusion, the 18% sales tax on imported cotton-related inputs was imposed to protect and revive the domestic cotton industry, ensure fair competition between local and imported inputs, and support sustainable growth in Pakistan’s textile exports. The measure followed industry pressure and budgetary commitments in response to the unprecedented surge in imports undermining local producers.
- The textile industry, a significant contributor to Pakistan's economy with over 50% of total exports, looks towards the sales tax on imported cotton-related inputs as a means to revive domestic production and support growth.
- The All Pakistan Textile Mills Association (APTMA) and other industry bodies view the implementation of the tax as a positive step towards stabilizing the domestic cotton market and incentivizing local production.
- To maintain balance and ensure both export competitiveness and the growth of the domestic industry, the government has made a strategic decision to exclude imported inputs from the Export Facilitation Scheme, despite initial requests from APTMA for their complete exclusion.
