FBR to Impose Sales Tax on Imported Raw Materials in Export of Finished Goods

The Federal Board of Revenue (FBR) is poised to introduce sales tax on imported raw materials used in the export of finished goods in the upcoming federal budget for 2025-26. This decision stems from the International Monetary Fund's (IMF) pressure to standardize tax treatment across all sectors, including the elimination of special tax regimes and reduced rates benefiting exporters. FBR Member Inland Revenue Policy, Najeeb Ahmad, revealed this development in a National Assembly Standing Committee on Finance meeting. The proposal, initially overlooked in the previous budget, has resurfaced due to mounting IMF pressure.

Key Takeaways:

• The Federal Board of Revenue (FBR) plans to impose sales tax on imported raw materials used in the export of finished goods under the Export Facilitation Scheme (EFS) in the 2025-26 federal budget.
• The International Monetary Fund (IMF) has been pushing for the standardization of tax treatment across all sectors, including the elimination of special tax regimes and reduced rates benefiting exporters.
• The IMF has also been advocating for uniformity in tax policy, as FBR Member Inland Revenue Policy, Najeeb Ahmad, pointed out, stating "The Fund wants uniformity in tax policy. Exemptions for exporters cannot be justified when other sectors are taxed at standard corporate rates."
• Exporters had urged the government to reinstate the Final Tax Regime (FTR), a simplified 1% turnover tax system, but the FBR representative ruled this out, citing IMF objections to sector-specific concessions.
• The shift to the normal tax regime, subjecting exporters to corporate tax rates of up to 29%, has drawn sharp criticism from the business community, with concerns over the dual tax burden faced by exporters and the de facto double taxation resulting from the normal regime alongside minimum tax provisions.
• Karachi Chamber of Commerce and Industry (KCCI) President Muhammad Javed Balwani expressed concerns that exporters now face effective tax burdens ranging from 29% to 45%, which has hampered business viability and competitiveness.

Statistics:

• Effective tax burdens on exporters ranging from 29% to 45% (as quoted by Karachi Chamber of Commerce and Industry President Muhammad Javed Balwani)
• The loss of small and medium exporters due to high taxes, liquidity crunch, and delayed refunds under the FASTER system, which often takes months (as expressed by Karachi Chamber of Commerce and Industry President Muhammad Javed Balwani)
• 72-hour promise for refunds under the FASTER system, which often fails to meet its stated promise

Sources:

• The Express Tribune: FBR mulls imposition of sales tax on imported raw materials
• Dawn: FBR to impose sales tax on imported raw materials under EFS
• Business Recorder: IMF pressures FBR to standardize tax treatment