Industries Ministry Recommends End to Customs Duties and Import Taxes

The new National Industrial Policy (NIP) 2025–2030 has recommended that the Federal Board of Revenue (FBR) reduce Customs Duty (CD), Regulatory Duty (RD), and Additional Customs Duty (ACD) to impose zero tariffs on inputs, intermediate goods, and capital goods for domestic industries.

The FBR has received the new National Industrial Policy from the Ministry of Industries, which lays out a comprehensive reform plan aimed at reviving industrial competitiveness and shifting the economy toward export-led growth.

According to the policy, Pakistan’s industrial sector faces heavier taxation compared to sectors such as real estate, construction, wholesale, and retail. This imbalance lowers the return on industrial investment relative to other sectors. While manufacturing and mining together contribute 13.5 percent to GDP, they account for 58 percent of the overall tax burden, resulting in disproportionately high post-tax returns for non-industrial sectors.

The document warns that this imbalance has led to industrial land in Special Economic Zones being “colonised” for real estate use. It also highlights that multiple layers of taxation place exporters at a disadvantage compared to regional competitors. Corporate income tax remains high, the Export Development Fund (EDF) surcharge acts as an export tax, large firms are subject to an additional super tax, and exporters’ working capital remains tied up in withholding tax, delayed VAT refund claims, and pending Drawback of Local Taxes and Levies (DLTL) payments.

The policy notes that high taxes on imports—including customs duty, regulatory duty, additional customs duty, VAT, and withholding taxes—make domestic production more profitable than exporting. This structure prevents firms from entering global value chains. Tariffs on imported inputs have raised export costs, while “cascading” tariffs on final goods have boosted domestic market profits. The average tariff on consumer goods in Pakistan is 35.4 percent, compared to 19.9 percent in Bangladesh and 12 percent in Vietnam. Imports used in manufacturing exports are also subject to sales and withholding taxes, further eroding competitiveness.

The tariff reform plan seeks to reorient the economy away from import substitution toward export promotion. The policy recommends implementing the Tariff Policy Board’s proposals for significant reductions in CD, RD, and ACD over the next five years. Each customs duty band (slab) should be reduced to achieve near-zero tariffs on inputs, intermediate goods, and capital goods, with only modest protection on final goods in line with dynamic regional economies. RD and ACD should be eliminated within five years, while exemptions under the 5th Schedule to the Customs Act should be phased out during the same period. Following these proposals, the average trade-weighted tariff should fall below 5 percent by 2030.

The policy also calls for a comprehensive review of tariffs and industrial taxes within six months. The Tax Policy Unit will incorporate the findings into its tax rationalization plan in consultation with the FBR and Prime Minister’s Office (PMO) within the following six months. A timeline will then be established for gradual reductions based on available fiscal space.

The review will also consider the reduction or elimination of VAT on imported inputs used in exports. In most fast-growing Asian economies, exports are exempt from VAT; Pakistan’s current system of zero-rating ties up working capital as firms await refunds of sales tax paid on inputs. The Export Financing Scheme has allowed some exporters access to VAT-free imports, and the study will explore how this benefit can be extended to all exporters, including SMEs.

The policy further recommends abolishing the withholding tax on imported inputs for exports, as it effectively acts as another tariff layer, hurting cash flow and profitability. The FBR will also implement fast-track refund processing for sales tax, input duty, and DLTL claims, given the liquidity constraints faced by exporters.

The FBR will undertake a review of corporate taxation over the next three years to improve firm competitiveness. The review will consider reducing taxes with an eye toward business growth.

Currently, the Super Tax—levied on top of the Corporate Income Tax (CIT)—applies in ascending slabs of up to 10 percent on income over Rs 500 million. The policy warns that this discourages large firms that drive productivity growth. It proposes a phased abolition of the Super Tax over five years, subject to fiscal space.

Pakistan’s Corporate Income Tax rate of 29 percent is significantly higher than the regional average of 26 percent, which reduces competitiveness, compliance, and potentially total tax receipts. The review will consider gradually reducing CIT to 25–26 percent, depending on fiscal capacity.

At present, firms pay the higher of: (a) CIT at 29 percent on taxable income; (b) Alternative Corporate Tax at 17 percent on accounting income; or (c) Turnover Tax at 1.25 percent on gross turnover. The policy suggests simplifying this into a single, predictable CIT based on profit to eliminate distortions, once Pakistan exits the IMF program and fiscal conditions stabilize.

The document also calls for the removal of direct taxes on exports. The government should cease further collection of the Export Development Fund (EDF) from exporters (currently 0.25 percent of turnover), reform the EDF to be funded through general taxation, and withdraw the Infrastructure Development Cess for exporters in Sindh. It further recommends removing the 1 percent minimum turnover tax for exporters, while retaining the 1 percent advance tax adjustable against CIT.

The policy also suggests that income tax filing be made mandatory for all bank account holders, whether corporate or individual. To improve compliance and trust, it proposes a simplified online e-filing system for salaried individuals, retirees, sole traders, and SMEs, requiring only minimal information on a single screen.

Finally, the policy calls for simplified, risk-based tax auditing to ensure proportional and transparent enforcement. A three-tier audit framework will classify taxpayers as green (no audit), yellow (random sample), or red (risk-based scrutiny). The government aims to shift from “compliance policing” to “compliance partnering,” recognizing the private sector as a co-creator of national development, the policy concludes.

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The new National Industrial Policy (NIP) 2025–2030 has recommended that the Federal Board of Revenue (FBR) reduce Customs Duty (CD),… Read More

The post Industries Ministry Recommends End to Customs Duties and Import Taxes appeared first on ProPakistani.