Dr. Gohar Ejaz

Exports remained largely stagnant from 2012 to 2018, while regional competitors witnessed commendable export growth rates that strengthened their economies considerably. Our inward-oriented trade policies served as a substantial roadblock to the economy’s ability to keep pace in global trade, despite the great potential of our business sector. Then in 2019 as a result of regionally competitive energy tariffs and TERF, considerable progress was made thereby increasing exports by 60% over the following 3 years. However, this progress led to a situation where exporters’ working capital and ease of doing business needs became more acute.

Textile Exports

With the withdrawal of Zero-Rating (SRO 1125) and the implementation of a 17 percent General Sales Tax (GST) on export-oriented sectors, the cost of doing business has increased to unsustainable levels, as a consequence of the liquidity crunch from the non-payment and delay in refund of GST collected.

Sales tax is consumption based, which inflates inventory and capital costs, serving as an impediment to new projects as capital cost increases by 20 percent and refund can only happen after commercial operations. According to a report by the IMF, the cascading effect of GST has harmed Pakistani exporters’ competitiveness as there is currently no systemic method to ensure that all tax paid on inputs may be charged against a final sale is fully refunded. In this huge cycle of sales tax collection, exporters suffer in the form of delayed pending and deferred refunds. The cost of collecting and refunding sales tax outweighs the revenue collected by a significant margin. The administrative cost of collecting and refunding sales tax is estimated at Rs 10 billion. The imposition of sales tax has resulted in billions (over Rs. 250bn) of rupees in liquidity transferring from the industry to the FBR. Despite the commitment to pay refunds within 72 hours under the FASTER system.

Rather than encouraging import substitution, these regressive policies are doing the exact opposite by dis-incentivizing local production and promoting cheap imports. For instance, when a company holding a DTRE, Bond or EOU license needs to buy raw materials like cotton, yarn or greige fabric, if it imports them through these schemes, it does not have to pay sales tax or duties, whereas, if they buy the same material from domestic industry, it is required to pay 17% GST and wait for its ultimate refund after exports which entails a minimum wait of nine months.

The counterproductive GST system has distorted the level playing field for local manufacturers and now heavily favors sales tax free imports. It appears that the government policies do not take into account the need to develop and support domestic industry and are actively substituting local production with imports. Consequently, the economy has been undergoing premature de-industrialization and capital is rapidly draining from the country.

Requiring businesses to first pay taxes and then later struggle to obtain refunds is an irrational policy measure for several reasons. Firstly, the government already owes refunds worth over Rs 250 billion to exporters and has no fiscal space for making that payment. Secondly, there is no reason for exporters to believe that they will get their sales tax refunded in due time while their prior refunds still remain unpaid, thereby depriving them of liquidity and of their own resources which could very well have gone towards modernization and expansion. Eliminating the sales tax waiver for a fragmented industry with a long and complex value chain has increased the production cost for exporters.

In a rational policy environment, to keep businesses liquid this sales tax should have been imposed in a step-wise progressive manner. It is still in vital interests of the exports and economy that the government should consult stakeholders for initially imposing a rational percentage of sales tax to ensure adequate cash flow and hence timely fulfillment of export commitments. In all countries, Value Added Tax (VAT) begins at extremely low rates and gradually rises. When it is performing well, the tax would be gradually increased.

On one hand, the government advocates promotion of exports and ease of doing business, but on the other hand problems have been created for industries. The government should commit to the oft-quoted economic direction of export-led growth so that the country may move forward on the path of economic development by promotion of business and industrial activities.

The zero-rated regime for the whole textile supply chain was first introduced by the Finance Act 2005 to stimulate export-oriented sectors in Pakistan and minimize flying invoices, which was resulting in more refunds than tax collection. Zero rating was then withdrawn in 2013 without providing the expeditious refund system that was committed, thereby creating liquidity a crunch for exporters. Then zero rating was restored in 2016 but subsequently rescinded for the export-based industry in the June 2019 budget announcement. This decision was based on a misrepresentation of facts and pretext by Federal Board of Revenue (FBR). FBR claimed that the domestic sales constitute more than 50 percent of all sales from the textile sector and somehow the industry was evading approximately $12 billion worth sales tax on domestic sales. However, domestic sales of the sector do not exceed 20% of industrial output, as later conceded by FBR. Back in 2019, the government assured industrialists that they will examine the issue in 6 to 8 months, but no such review has been taken even after the passing of 3 years.

In July 2019, FBR issued bonds in lieu of sales tax refunds pending, but these bonds were not of any value as no bank was willing to discount them. Following the failure of the bond system, the FBR implemented the FASTER system, which guaranteed reimbursements within 72 hours. FBR claimed that they had implemented a robust and sustainable sales tax claim refund system to ensure that exporters do not face a liquidity crisis as a result of the withdrawal of sales tax exemption for them. Despite making a commitment to pay refunds within 72 hours, the FBR has not honored this commitment It must be noted that a significant amount has accrued as “Deferred Sales Tax.” As a matter of routine, a portion of the claims through Sales Tax returns are routinely deferred or rejected by FBR. A large proportion of the amount vanishes into thin air being neither paid nor rejected or deferred. The FASTER system usually raises typical objections and errors in the data, which can be resolved by refund processing officers. Yet the system is unresponsive and unable to cater for the complexity of the textile sector, and is therefore in need of serious review and modifications.

Because of the high rate of sales tax, trade volumes outside the Sales Tax System have expanded, resulting in smuggling, outright fraud, and the import of used clothing into the country. Pakistan is among the top importers of used clothing. Meanwhile India, which has a much larger population and higher poverty rates, has at least half the import value of Pakistan. This indicates that Pakistan is importing fresh textile and apparel under the guise of used clothing in order to avoid taxes and tariffs. This happens to be rejected new apparel and clothing from all over the world that is dumped on our market at extremely low prices under the guise of worn clothing. This creates a cheap alternative that is impossible to compete with. Pakistan imported used clothing in FY21 at a cost of about $1.4 per capita per year, while India usually imports at a cost of $0.8 per capita per year. Pakistan imports about 43 percent more used garments than India.

In the last five years, Pakistan’s imports of worn clothing increased by 153 percent in quantitative terms and nearly 200 percent in value terms.

Since our import of used clothing is unsustainably high, we suggest that the government must;

• Incentivize local production and sales to prevent smuggled and imported apparel, which impacts the balance of trade
• Implement effective anti-dumping and under-invoicing laws
• Impose 20% regulatory duty on used clothing imports in order to prevent the misuse of regulation. Duty-free imports should be available exclusively to registered charities importing used clothing.
• At the point of entry, the Customs Enforcement Directorate shall conduct a routine check on all containers labelled as used clothing.

When collecting sales tax on domestic sales, it should be deducted at the Point of Sale. This will subject any product sold domestically from any source to a 17 percent sales tax, including smuggled goods. As a result, the domestic market will remain regulated and classified as “Made in Pakistan”.

Textile exports are expected to increase from $19.35 billion (FY 22) to $ 25 billion this fiscal year and $50 billion over the next four years. Considering that our currency has depreciated by 60-70% in the last year, exports have climbed to over Rs. 3 trillion, but working capital has not increased. To bridge the gap, industry requires double the amount of working capital that is currently available – and this is further exacerbated by the situation where in order to impose sales tax on domestic sales of textiles, the whole sector gets roped in. Under these circumstances, the restoration of zero-rating is imperative to improve exporters’ liquidity position, improve competitiveness and act as a deterrent to cheating and smuggling, and as a result, the market will remain documented and largely made in Pakistan.

The pace of competitiveness and modernization in the global textile market is progressing exponentially. In order to effectively compete, we must lower our cost of doing business and make it comparable to our regional competitors such as India, Bangladesh, and Vietnam. To achieve the targeted exports, business-friendly policies should be ensured for the industry to grow and further achieve increased targets on a yearly basis. There is immense potential in the textile industry to engineer an economic turnaround and achieve targets not only in exports but in economic growth, through consistent policy support.

Shahid Sattar and Amna Urooj

One of the most important industrial sectors, the textiles industry contributes significantly to national economies, job creation, and exports in developing nations such as Pakistan. The size of the global textile market, estimated at USD 993.6 billion in 2021, is expected to increase at a 4.0% compound annual growth rate (CAGR) according to a report by Mordor Intelligence. In 2021, Asia Pacific held the highest share in the textile market. China leads the global textile exports, meanwhile Pakistan has a share of 2% in global textile exports. All of the world’s major textile economies, including Pakistan, have grown in the first nine months of 2022. Due to the ongoing global recession, there are concerns about a decline in the most recent quarter, however, unusual growth occurred in the first three quarters of 2022. China, Bangladesh, Indonesia, Vietnam, Italy, Turkey, Germany, and Pakistan all saw strong increases in textile exports. Pakistan’s textile exports scaled by 5% in the first quarter of FY23 compared to September’21.

However, export numbers are not the only benchmark of performance for textile industries in twenty first century. If textile firms follow Sustainable Business Practices, and show a satisfactory status of Sustainable Business Practices, only then they’re able to compete in the modern world. Simply stating, making a profit while also having a positive impact on society (the people), the environment (the planet) is only possible with sustainable business practices – the three Ps. In today’s corporate world, sustainability is a critical component of social and environmental responsibility and is a fundamental first step in protecting the earth for future generations. These practices not only save money, cut down on waste, and save natural resources, but they also aid in protecting the environment and the inhabitants of it.

Few examples of Sustainable Business Practices include using renewable energy, manufacturing environmentally friendly products, recycling and reduction of waste, sustainable packaging, composting, ethical sourcing, sustainable supply chain management, employee welfare, fulfilling corporate environmental and social responsibility and finally sustainability reporting.

Even though the textile sector of Pakistan is seen as one of the most significant sectors from an economic perspective, the supply chain for this sector is plagued by serious environmental and social issues. The primary environmental issue connected to the textile industry is the pollution of water bodies brought on by the discharge of untreated effluents. The sector also contributes to air pollution as dust, cotton lint, and other pollutants are produced during spinning and weaving, which worsens the working environment. Environmental protection was once the textile industry’s most neglected sector, but as people’s awareness of the issue has grown in response to the depletion of nonrenewable resources, the effects of climate change, and ecological destruction, it is now widely acknowledged that a more responsible approach to the environment is required.

Pakistani textile firms are continuously striving hard to adopt Sustainable Business Practices. One of the examples is that of Net Zero Pakistan. It is a national partnership involving cutting-edge businesses, government organizations, and sectoral specialists to achieve Pakistan’s objective of net zero carbon by 2050. The alliance is on its way of setting out the plan and structure by which Pakistan’s private sector may hasten its transition to sustainability and accomplish this net zero objective. Out of the 23 signatories of this partnership, 22 belong to the textile and apparel sector such as Gohar Textiles, Crescent Bahuman and many others. The signatories have committed and set net zero targets, affirmed to measure and disclose transparently the levels and sources of GHG emissions, vowed to decarbonize value chains and lastly have shown interest in advocating for climate action.

The textile sector is also actively engaging in international conventions and platforms such as ‘Better Work Programme’, ‘Decent Work Country Programme-IV (2023-27)’, ‘The Accord on Fire and Building Safety’, to name a few. Moreover, in lieu of its Corporate Social Responsibility (CSR) initiatives, All Pakistan Textile Mills Association (APTMA) has recently signed an MOU with National Emergency Operations Centre for Polio Eradication Initiative, a national coordination body of the Government of Pakistan to create an enabling environment to achieve a shared objective of attaining a healthy future by eradicating polio from Pakistan.

According to numerous analyses of empirical studies, the textile firm’s efforts to manage the environment are positively impacted by regulatory pressure (Jeswani et al. 2008; Babiak and Trendafilov 2011; Ervin et al. 2013). As an illustration, earlier studies shown that firms are more receptive to regulatory factors and in taking part in voluntary environmental programmes (Delmas and Toffel 2004; Jeswani et al. 2008). The reasons for going sustainable are industry agreements, regional environmental regulations, and national environmental regulations regarding water, waste, and energy efficiency. The reasons for going sustainable are also regional environmental regulations regarding water, waste, and energy efficiency (Sharma & Narula, 2020). Pakistani textile firms are, for example, under the regulatory pressure by European Union’s (EU’s) Scheme of Generalized Scheme of Preferences Plus (GSP+) to avail duty free export to EU. They are actively displaying a responsible attitude in the quest for a better position against such regulatory pressures.

The government’s environmental rules and regulations strengthen the management of Pakistani textile companies’ desire to put these methods into effect and aid in the improvement of their environmental performance. Despite the financial constraints they face, the impact of regulatory body pressure demonstrates that businesses are willing to invest resources to stop environmental deterioration given proper backing from government programmes. Instead of viewing regulatory pressure as a danger, they view it as an opportunity to become more environmentally friendly.

Competitive pressures are known to drive businesses to differentiate their products, boost production, and ultimately persuade them to embrace environmental management techniques. According to empirical research, market forces such as competition and demand are crucial in driving businesses to embrace sustainable practices. According to several empirical studies (Chkanikova and Mont 2015; Jeswani et al. 2008; Sgaard Jrgensen et al. 2010; Wu- et al. 2012), companies that were under more intense competitive pressure were more likely to adopt their competitors’ business models in order to maintain or even increase their competitive advantage. Pakistan accounts for a sizeable portion of worldwide textile exports, and in order to compete in the market, textile producers must satisfy customers’ environmental demands.

Textile firms are also influenced by market competition to enhance their environmental performance. Competition pressure has an impact on sustainability efforts, and green business practices that uphold environmental standard help businesses stay competitive. International brands frequently show a greater willingness to abide by environmental laws and have the brand value to persuade consumers to adopt environmentally friendly habits. Therefore, textile firms frequently use the same technique and create an environmental strategy based on international rivals.

Pakistani textile firms are taking steps to improve environmental performance, such as developing long-term contractual relationships with their suppliers, contractors, and agencies with proven credentials in waste recycling. Other actions done by them to ensure sustainability include selling cotton waste produced during spinning to be used in the production of inferior yarn and other home furnishings. These activities aid firms in expanding into new market niches, growing their local and international businesses, and maintaining their competitiveness as a result of which they see an increase in market share.

Furthermore, a positive relationship between the impact of “demand from foreign buyers” on sustainable business practices exists, according to prior research (Menguc et al. 2010). Market pressure has been shown to positively influence a firm’s commitment to environmental protection, increasing investment in environmental management practices, and encouraging environmental collaborations.

The production process in Pakistani textile firms also complies with textile standards including GOTS (Global Organic Textile Standards) and BCI (Better Cotton Initiative). These standards outline internationally accepted criteria that guarantee textiles are organic, including ecological and social norms supported by independent certification of the full textile supply chain. These standards allow textile producers and processors to export their organic fabrics with a single certification that is recognized in all important markets, leading to an increase in sales and total revenues for the firms. Nevertheless, several factors exist that impede the textile firms from adopting sustainable business practices along with their quest to pursue Sustainable Business Practices.

According to empirical research, administrative attitudes and dedication matter a lot when it comes to a firm’s decision-making and adoption of environmental management techniques (Petrini and Pozzebon, 2010; Wu- et al., 2012). Lack of internal environmental expertise, a lack of skilled human resources and environmental issue management skills, a lack of support from top management, and ultimately a communication gap from top management are the primary causes that cause managerial hurdles.

The technological capabilities of businesses may also have an impact on the adoption of sustainable business practices. According to certain studies, businesses with greater Research and Development (R&D) facilities may use more pollution control techniques to green their supply chains (Harrington et al. 2008; Ervin et al. 2013). Furthermore, organizational hurdles are sometimes a result of the lack of appropriate benchmarking tools. Government information and support for domestic businesses to use sustainable practices is lacking.

Sustainable Business Practices are adversely impacted if the company has economic obstacles such high implementation costs and a lack of financial resources. Since the textile sector requires a lot of money, financial recovery takes time. They have little money or resources to spend in high-cost technical advancement, Pakistani textile companies frequently choose low-cost technological solutions for production.

Pakistani textile companies are just beginning to incorporate Sustainable Business Practices. A lagging behind status is also a result of the different economic and institutional challenges that businesses in developing countries—such as Pakistan—face compared to those in rising economies.

Our textile businesses recognize and agree that the health and development of the textile industry depend on the natural environment and its preservation. Internal management and organizational constraints do not have a substantial impact on the firm’s operations, however a variety of factors including regulatory, market, and economic considerations are more relevant in forcing firms to adopt sustainable practices. In textile companies, external considerations (such as the danger of loss of markets) rather than internal ones are what are putting pressure on sustainability. However, addressing internal issues could significantly advance sustainability in these businesses. In order to further improve the scope of sustainability for textile enterprises, greater attention should be placed on the role of regulatory authorities. The businesses should also integrate a sustainable enterprise. To aid in developing that identity, the businesses should integrate a sustainable business plan from the very beginning. The training should incorporate knowledge of sustainable practices.

The initial cost of compliance is the main obstacle to implementing these practices when it comes to rules and financial restrictions. In addition, uncertain policy changes, weak enforcement, and low knowledge reduce manufacturers’ acceptance, necessitating cost regulation. Companies that are prepared to adopt environmental measures (especially Small and Mid-size Enterprises) must receive assistance from the government. For instance, if a company has established an effluent treatment plant (ETP), assistance should be offered. Assistance in the form of subsidized loans and credits will also go a long way. Additionally, there shouldn’t be any managerial distinction made between domestic and international customers’ interests; after this is done, attention shall turn to incorporating pollution control strategies. The adoption of the proactive environmental policies by businesses should be aided by the strengthening of national and regional legislation. The adoption of a proactive environmental strategy by businesses will help them make the best decisions and commit to more extensive environmental practices. This will be made possible by the strengthening of national and regional legislation.