“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]

y dismantling Final Tax Regime for exporters of goods and converting withholding tax into minimum tax regime in addition to application of normal tax regime, the Finance Act 2024 has done something far more consequential than revising income tax rates. It has not only violated the constitution but also destroyed the process of exporting goods. The shift to NTR/ MTR, combined with the withdrawal of sales tax zero-rating on local inputs under the Export Facilitation Scheme, exemplifies the worst possible fiscal overreach, causing substantial economic self-harm.

From 1995 to 2024, exporters of goods were taxed under the FTR. A small percentage of export proceeds — historically one percent —deducted at source constituted full and final discharge of tax liability. There were no further assessments, no deductions, no adjustments, no audit and no refund. The state received revenue upfront; exporters enjoyed certainty.

That balance, though imperfect, provided stability in an industry exposed to volatile global markets. The arrangement ensured immediate revenue for the state and confidence for exporters. That position changed from tax year 2025 onwards. Export income is now included in total income and taxed at the applicable rates. However, tax withheld under Section 154 of the Income Tax Ordinance, 2001, still constitutes minimum tax liability.

Large export-oriented manufacturing companies, exposed to the standard income tax rate of 29 percent, even in case of losses, are thus denied refund of tax withheld at source. Additionally, they are subjected to minimum tax on turnover under Section 113 and alternate corporate tax under Section 113C of Income Tax Ordinance, 2001. On top of this, super tax under Section 4C — ranging between one and ten percent depending on income thresholds—may apply. Additional levies such as Workers’ Welfare Fund, Workers’ Profit Participation Fund, infrastructure cess and other statutory charges further increase the overall burden.

The shift is not marginal. Under the previous regime, effective tax incidence on export proceeds was one percent. Under the present structure, effective exposure on taxable profits may approach 60 per cent once corporate tax, super tax and statutory contributions are aggregated. Even if the effective rate varies across firms, the difference between one percent final discharge and potential multi-layered taxation is substantial.

The constitutional dimension adds another stratum of complexity. Entry 47, Part I of the Federal Legislative List, empowers the parliament to levy taxes on income other than agricultural income. Entry 52 allows taxation based on production capacity “in lieu of” income tax.

The Supreme Court (in Elahi Cotton Mills case) has enunciated that these entries provide alternative methods of taxation, not concurrent ones. When minimum tax based on turnover operates alongside normal income tax, question arises whether the boundary between income taxation and capacity-based taxation has been blurred? Beyond constitutional theory, economic data underscores the stakes.

Pakistan’s total exports stood at approximately $35.4 billion in fiscal year 2023. In FY2024, exports declined to around $30-31 billion. Estimates for FY2025 suggest recovery to roughly $31-32 billion — still below earlier peaks and official targets. While global demand cycles, exchange rate adjustments and energy costs influence these figures, the tax shift coincides with a period of stagnation rather than acceleration.

The textile sector, which contributes close to 60 percent of total exports, remains particularly sensitive. A leading value-added textile exporter with annual exports near $700 million illustrates the pressure. After accounting for corporate tax at 29 percent, super tax at 10 percent, WWF, WPPF and infrastructure-related levies, retained earnings narrow sharply. Expansion in such an environment requires either increased borrowing — costly in a high interest-rate regime — or reduced reinvestment.

At the same time, amendments to the Export Facilitation Scheme have withdrawn zero-rating on local inputs while imported inputs continue to receive preferential treatment. Locally procured inputs now attract 18 percent sales tax upfront, subject to refund. In practice, refund processing delays can stretch for months so that working capital is immobilised. In industries where net profit margins range between five and eight percent, cash flow disruption alone can determine operational viability.

Industry bodies have publicly documented these concerns. The Pakistan Business Council has argued that moving exporters to the normal tax regime makes them less competitive than peers in Bangladesh and Vietnam, where export-oriented industries benefit from concessional tax structures and timely refund systems. Chambers of commerce in Karachi, Lahore and Faisalabad have highlighted liquidity constraints as a central obstacle to export recovery.

The asymmetry between goods and services exporters further complicates the picture. While goods exporters have been removed from the Final Tax Regime, service exporters continue to enjoy final discharge treatment. Both categories earn foreign exchange, yet their fiscal treatment diverges. This differential alters relative incentives within the economy, favouring sectors less reliant on large-scale industrial employment.

Regional comparison is instructive. India processes GST refunds to exporters through automated systems to prevent liquidity blockage. Bangladesh provides cash incentives and duty-free access to inputs to sustain its textile sector, whose exports exceed $40 billion annually.

Vietnam integrates tax facilitation with trade agreements, maintaining corporate rates below Pakistan’s while offering export-oriented incentives. Pakistan’s approach, by contrast, increases forthright tax collection while relying on refund mechanisms that remain partially manual and complex.

Fiscal pressures on the state are undeniable. Revenue mobilisation remains critical for debt sustainability and public expenditure commitments. However, the revenue strategy must account for long-term elasticity. Excessive extraction from compliant sectors risks shrinking the tax base over time. When formal exporters face rising compliance costs and reduced margins, smaller firms may exit or revert to informality, undermining documentation efforts.

Policy stability is equally important. Export-oriented investment decisions — whether in spinning capacity, garment finishing lines or technological upgrades — are multi-year commitments. Frequent shifts between final tax, minimum tax and normal assessment frameworks create uncertainty that discourages expansion.

Export-led growth remains central to macroeconomic stability. Pakistan’s external account, exchange rate stability and industrial employment depend on expanding export volumes rather than redistributing a stagnant base. A taxation framework that reduces predictability or absorbs a disproportionate share of profits risks weakening that foundation.

Recalibration is therefore necessary. Restoring certainty — whether through a refined final tax regime with anti-abuse safeguards or a moderated normal regime — can reduce compliance volatility. Ensuring automated, time-bound refunds can ease liquidity stress. Aligning treatment of local and imported inputs can prevent distortion of domestic value chains.

The structure of taxation determines whether it supports or constrains growth. Export policy must align fiscal objectives with competitiveness realities. Otherwise, short-term revenue gains may come at the expense of long-term industrial capacity. Pakistan’s path to sustained growth lies in expanding exports, not in suppressing them.

The writers are lawyers, adjunct faculty at Lahore University of Management Sciences and members of the advisory board of Pakistan Institute of Development Economics.