The government has introduced stricter rules for the Export Facilitation Scheme (EFS) to prevent misuse by manufacturers who were taking advantage of tax exemptions. The Economic Coordination Committee (ECC) of the Cabinet has approved major changes to the 2021 EFS to stop tax evasion and ensure fair trade practices.
Stricter Rules to Prevent Misuse:
Many manufacturers were found using EFS to avoid the newly introduced 18% sales tax. Instead of buying raw materials locally, they were importing them to benefit from tax exemptions. This loophole resulted in revenue losses for the government and increased the country’s trade deficit.
To prevent this, the ECC has replaced insurance guarantees with bank guarantees for imported raw materials. The utilization period for these materials has also been shortened from five years to just nine months, with an additional three-month extension allowed under special approval.
Authorities also discovered that some manufacturers were illegally selling imported raw materials in the local market while using domestic alternatives for exports. This tax evasion strategy was harming local businesses and creating unfair competition.
Balancing Local and Imported Materials:
To ensure fair competition between local and imported materials, the Ministry of Commerce will review the entire scheme by March. The goal is to create a balanced policy that allows genuine exporters to benefit while stopping misuse.
Additionally, government agencies will now verify input-output ratios to confirm that imported materials are used for their intended purpose. New monitoring mechanisms will be introduced, including vendor facilitation controls and sample testing of exported goods.
The government has also removed iron, steel, and scrap importers from the EFS, as they were only extracting copper without adding value.
Background and Impact of EFS:
The Export Facilitation Scheme, introduced in 2021, was designed to help exporters by providing tax-free raw materials, components, and machinery. It covered manufacturer-exporters, commercial exporters, common export houses, and vendors. Approved users were vetted by the Customs Department and the Input-Output Organisation (IOCO).
Although the scheme was meant to reduce business costs and simplify tax compliance, its misuse has raised concerns about the effectiveness of Pakistan’s customs and trade monitoring systems. The failure of the Federal Board of Revenue’s (FBR) WeBOC system and Pakistan Single Window to detect fraud has led to calls for stricter enforcement.
Additional ECC Decisions:
Apart from tightening the EFS, the ECC has approved nearly Rs3 billion in additional funding for various security and infrastructure projects. This includes:
- Rs2.8 billion for the procurement of arms, ammunition, and land for anti-smuggling check posts.
- Rs494.6 million for constructing barracks and check posts for the Frontier Corps in Khyber Pakhtunkhwa (North).
- A review of Rs1.8 billion in funding for the Reko Diq project, with further details required before approval.
The ECC also approved an amendment to a mediation agreement related to K-Electric’s tariff differential subsidies and payments to state-owned enterprises. However, it clarified that this change would not result in any increase in electricity tariffs.
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