ISLAMABAD: Pakistan’s National Tariff Policy 2025–30 is beginning to reshape the country’s approach to import duties, with early revenue figures suggesting progress towards reducing reliance on import-based taxation. However, industry representatives argue that the 18% General Sales Tax (GST) remains a major obstacle to fair competition, particularly because businesses operating in the informal sector can avoid paying it.
The tariff policy aims to move customs duties away from their traditional role as a major source of government revenue and use them instead as an instrument of industrial policy. Its broader objective is to encourage competition, improve productivity and strengthen export performance.
Early figures indicate that import-based revenue has fallen from more than 50% of overall tax revenue to below 40%, despite increases in import volumes and customs revenue. This trend is consistent with the policy’s objective of reducing dependence on import taxation while gradually lowering tariff rates.
Pakistan’s exports show encouraging growth
Assessing the policy’s impact on industrial production, competitiveness and the trade balance remains premature, as the reforms are designed to unfold over five years. Nevertheless, recent export figures offer some encouraging indications.
Pakistan’s provisional goods exports reached $8.42 billion during the first quarter of fiscal year 2026–27, representing year-on-year growth of 10.84% compared with $7.59 billion in the corresponding period of the previous fiscal year.
Agriculture and food exports increased by 23%, while manufacturing, mining and energy exports rose by 17%. Textiles and apparel recorded growth of 6%.
These figures broadly align with the policy’s ambition to support export growth through tariff reforms, with a target of 14% growth by 2030. However, the available data do not establish that tariff reductions alone are responsible for the improvement.
Why tariff protection remains controversial
Pakistan’s tariff debate is often presented as a choice between protecting domestic manufacturers and exposing them to foreign competition. However, the underlying issue is whether the government should continue using different rates of customs duties, regulatory duties and additional customs duties to influence investment and market competition.
A system with varying tariff rates across industries can favour selected sectors while placing others at a disadvantage. A more predictable and broadly uniform regime would allow businesses to compete increasingly on productivity, product quality and export capability rather than their access to government protection.
The National Tariff Policy seeks to move towards lower and more uniform tariffs across industries and value chains. Under this approach, customs duties should gradually become less important as tools for directing investment or selecting preferred sectors.
A gradual transition may be necessary, but the long-term objective is to create a competitive environment in which no industry receives preferential treatment without a clear policy justification.
Industry says domestic costs justify protection
Opponents of rapid tariff reductions argue that Pakistani manufacturers face a cost disadvantage of around 20% to 30% compared with foreign competitors.
They attribute this gap to expensive energy, inadequate infrastructure, high borrowing costs, weaknesses in the rule of law and regulatory difficulties. From their perspective, protective tariffs help compensate for these structural disadvantages and provide local businesses with a more level playing field.
This argument has traditionally supported different levels of tariff protection for different industries. However, maintaining such protection indefinitely risks weakening incentives to improve efficiency and address the underlying problems affecting production costs.
The challenge is therefore not simply to reduce tariffs, but also to improve the wider business environment so that domestic manufacturers can compete without relying on permanent protection.
Why the 18% GST is becoming a bigger concern
An important argument raised by industry representatives at a recent seminar was that customs duties are becoming less of a concern than the high rate of General Sales Tax.
Pakistan’s standard GST rate is 18%, and businesses that comply with tax requirements must account for their obligations. Informal businesses that evade taxation can gain a price advantage over documented competitors, undermining fair competition.
Industry representatives argue that this imbalance cannot be resolved through customs protection alone. Instead, they have proposed reducing GST to 5% across the board to lower the incentive for businesses to remain undocumented.
Supporters of this proposal believe a substantially lower rate could encourage more businesses to enter the formal economy and improve tax compliance.
However, a reduction from 18% to 5% would also have significant implications for government revenue. Its overall impact would depend on how businesses respond, how effectively compliance improves and whether the expansion of the tax base offsets some of the revenue lost through the lower rate.
The central issue is how to achieve a tax system that encourages formalisation while maintaining sufficient revenue to fund public services.
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Lower borrowing costs and alternative energy offer relief
Not all industries are seeking continued tariff protection. The steel sector, for example, has been adjusting to changing market conditions.
Two important developments over the past two years have been the potential reduction in the cost of capital and the emergence of alternative electricity sources. These changes can help offset some of the other cost disadvantages faced by manufacturers.
They also highlight why industrial competitiveness depends on a wider range of factors than customs duties alone. Access to affordable financing, reliable energy and efficient infrastructure can be just as important in determining whether local firms can compete with international producers.
Tariff cascading could preserve inefficiencies
Another concern is the continuation of tariff cascading, under which higher tariff rates apply to finished products than to imported raw materials and intermediate goods.
This structure is intended to encourage domestic processing and assembly by giving local producers an advantage over imported finished goods. However, it can also preserve inefficient production arrangements by making assembly more attractive than developing competitive manufacturing capabilities.
Although the National Tariff Policy is gradually reducing overall tariff rates, the continued use of tariff escalation means the underlying structure is not being dismantled entirely.
Lower rates may reduce the economic impact of cascading, but they will not necessarily eliminate the incentives it creates.
Why assembly-based industrialisation has limits
A strategy centred on importing components, assembling them locally and protecting finished products with high tariffs can create an appearance of industrial growth without establishing a globally competitive manufacturing base.
The experience of Pakistan’s mobile phone manufacturing policy has raised questions about whether assembly and tariff protection alone can deliver sustainable industrial development.
Long-term competitiveness requires more than assembling imported components. It depends on developing expertise, investing in research and development, improving production processes and establishing strong links with international manufacturers and suppliers.
Pakistan needs to identify products and industries in which it can build a genuine comparative advantage. It can then develop value-chain partnerships with leading global producers and encourage investment in higher-value activities.
Achieving this objective requires a more supportive environment for innovation and research, alongside predictable tariffs and access to competitive inputs.
A broader approach to industrial competitiveness
Pakistan’s tariff reforms represent an effort to reduce dependence on import-based taxation and encourage a more competitive industrial economy. Early export figures provide encouraging signs, although more time and evidence will be needed to assess the policy’s overall impact.
The debate also highlights the limitations of relying on customs duties to compensate for weaknesses elsewhere in the economy. High energy costs, expensive financing, inadequate infrastructure and uneven tax compliance require their own policy responses.
For industry, the challenge is to compete in a market where formal businesses are not disadvantaged by tax evasion. For the government, it is to reduce unnecessary protection while improving the conditions needed for productive investment.
The long-term objective is an economy in which businesses succeed through efficiency, innovation, quality and export performance rather than their ability to secure tariff advantages.
