Pakistan imported goods worth nearly US$69 billion in fiscal year (FY) 2025-26. Of this, US$27.02 billion—39.2 percent of the import bill—entered without customs duty. Machinery, chemicals and textiles accounted for most of the duty-free imports. The figures are being presented, with justification, as evidence that the National Tariff Policy 2025-30 is lowering the cost of industrial inputs and moving the country away from protectionism. [1]
There is one question the headline number does not answer: how much did those supposedly duty-free goods actually pay at the border? In Pakistan, “customs-duty free” does not necessarily mean “border-tax free”.
An input carrying zero customs duty can still attract sales tax, the three percent value-addition tax where the Twelfth Schedule to the Sales Tax Act, 1990 applies, advance income tax under section 148 of the Income Tax Ordinance, 2001, federal excise where relevant, and other charges. If these amounts are fully and promptly adjustable, the economic burden can be limited. If credits are restricted, refunds are delayed, or a collection becomes minimum tax, the charge moves from a neutral collection mechanism towards a real cost of production.
That distinction is the missing centre of Pakistan’s tariff debate. We are rationalising the Customs Tariff but have not yet rationalised the total fiscal incidence of importation. For exporters, manufacturers and small suppliers, nomenclature is secondary. What matters is the cash that must leave the business before an imported input can enter production.
A genuine policy break
The present reform is nevertheless important. The National Tariff Policy 2025-30 seeks to replace the five customs-duty slabs with four rates—0, 5, 10 and 15 percent—phase out Additional Customs Duty (ACD), eliminate Regulatory Duty (RD) over the policy period, and move the Fifth Schedule’s concessionary architecture towards the First Schedule. The policy targets a simple average tariff of 9.7 percent by FY2030 and places export-led growth, global value-chain integration, consumer welfare and predictability at the centre of tariff policy. [2]
The second year has not been abandoned. FBR’s FY2026-27 budget measures reduce customs duty on industrial inputs, cut ACD across thousands of tariff lines, cap or reduce RD across a broad range, and continue pruning Fifth Schedule concessions. [3]
Dr. Manzoor Ahmad, a trade policy expert, has rightly described the reform as a move away from import substitution towards competitiveness, while urging consistency so that the old protectionist equilibrium does not quietly return. [12]
This is not an ideological argument for indiscriminate free trade. It is a productivity argument. Protection can be justified temporarily where there is a defensible infant-industry, strategic or unfair-trade case. The question is whether protection raises productivity and exports over time, or merely raises domestic margins behind a captive market.
The evidence has become harder to ignore
Recent empirical work strengthens the case for lowering the cost of production-related imports. Noorulain Hanif and Ahsan Abbas, using Pakistani data from 1981 to 2024, estimate that a one percent increase in tariffs on production-related imports reduces those imports by about 0.28 percent.
More significantly, when raw materials, intermediate inputs and capital goods are combined, a one percent increase in predicted production-related imports is associated with about a 1.26 percent increase in exports. The precise coefficients should not be converted into mechanical forecasts, but the direction is powerful: imports used in production are not the enemy of exports; they are often their precondition. [4]
The same study identifies Pakistan’s import regime as a mixture of Customs Duty, ACD, RD, withholding tax, sales tax and excise duty, and notes that para-tariffs can push effective protection above the rates visible in the tariff schedule. It also invokes the familiar Lerner symmetry: taxing imports used by producers can operate as an implicit tax on exports because it raises the cost base from which exporters must compete. [4]
PIDE’s 2025 policy brief reaches a similar policy conclusion. It argues that Pakistan’s tariff structure remains complex, raises input costs and creates anti-export bias; it supports four simplified slabs, elimination of ACD and RD, migration from the Fifth to the First Schedule and integration of tariff reform with logistics, finance and regulatory reform. Its cited modelling projects export gains of 10-14 percent against import growth of 5-6 percent, while warning that implementation capacity and complementary reforms will determine the outcome. [5]
Islamabad Policy Research Institute (IPRI) places the same problem in a wider setting: Pakistan’s reliance on high tariffs for revenue has raised production costs, discouraged investment and constrained participation in global value chains. It cites an estimated US$24 billion of untapped regional export potential and recommends lower tariffs on raw materials, simpler regimes, removal of hidden tariffs and a shift towards direct taxation. [6]
The private-sector discussion recorded by Consortium for Development Policy Research (CDPR), International Growth Centre (IGC) and the World Bank adds an important warning. Businesses supported tariff reform but repeatedly said it would fail without a simplified tax system, lower energy and logistics costs, predictable policy and better access to finance. Participants from fisheries and aquaculture reported that combined regulatory, sales and income tax burdens could become extraordinarily high relative to earnings. Their message was not “tariffs alone”; it was “total cost of doing business”. [7]
Jamil Nasir’s tariff tripod – and the missing fourth leg
Jamil Nasir’s 2020 paper, The Tariff Tripod of Pakistan, remains one of the clearest explanations of how the system evolved. Jamil described three competing purposes: protection of domestic industry, export promotion and revenue generation.
Protection came through high duties on output goods; exporters received exemptions and special schemes; revenue came through multiple levies at import stage on tariff-inclusive values. About half of FBR’s revenue was then being collected at import stage. [8]
Jamil’s presentation to Pakistan Institute of Development Economics (PIDE) made the policy implication explicit: the high incidence at import stage encouraged smuggling, undervaluation, misdeclaration and evasion; strategic protection should carry a sunset date; and all species of import duties and taxes on input goods should be phased out, with zero duty embedded in the tariff code rather than dispensed through discretionary exemptions.
The presentation he made testified reinforced the published paper’s central insight: the incidence paid at the border is greater than what appears in the customs tariff alone.
The Prime Minister’s Committee on tariff rationalisation itself recognised the problem in 2024. Its discussions included quantifying the impact of internal taxes at the import stage and identifying distortions that restrict export-led growth. That mandate should now be completed rather than treated as an appendix to customs reform. [9]
The legal wall behind the tariff wall
The Sales Tax Act, 1990 is the first layer. Section 3 charges sales tax at the standard rate on goods imported into Pakistan. The tax does not disappear merely because customs duty is zero. The value of imported goods for sales-tax purposes is also linked to customs valuation and includes customs duties and federal excise where applicable. [10]
The Twelfth Schedule to the Sales Tax Act, 1990 creates a further three percent value-addition tax on imported taxable goods, subject to listed exclusions. Raw materials and intermediary goods imported by a manufacturer for in-house consumption are excluded, as are specified plant and machinery imported by a manufacturer for in-house installation or use. Those exclusions are useful but incomplete.
Modern supply chains contain commercial importers, indirect exporters, specialised suppliers, assemblers and small manufacturers that do not always fit the narrow legal path from importer to in-house consumption.
The Income Tax Ordinance, 2001 creates the second major layer. Section 148 requires Customs to collect advance income tax from importers at rates prescribed in the First Schedule. The rate base itself is increased by customs duty, sales tax and federal excise duty.
More revealingly, section 148(5) says that where imported goods are exempt from customs duty, advance income tax is collected at the time customs duty would have been payable had the goods been dutiable. Section 148(7) then treats the collection as minimum tax on income arising from imports, subject to the statutory exception for specified industrial imports for own use. This is why substance matters more than labels. [11]
Income tax is conceptually a tax on income. Importation proves that a transaction occurred; it does not by itself prove that taxable income was earned. Where section 148 of the Income Tax Ordinance, 2001 is merely an advance fully credited against a later liability, the distortion is smaller. Where it becomes minimum tax, or where the importer must finance it for months before adjustment, it acquires the character of a border charge on economic activity.
Why refundable does not always mean neutral
A conventional value-added tax can legitimately be collected on imports without becoming protectionist, provided an equivalent domestic tax applies and business input credit is immediate and complete. Pakistan’s difficulty is administrative reality. Refund delays, carry-forward restrictions, audit uncertainty and blocked credits turn a theoretically neutral tax into working capital financed by the producer.
For a large group with cheap financing, that may be irritating. For a small exporter paying double-digit borrowing costs, it can determine whether an order is viable. The exporter has not yet manufactured, sold or earned a profit, but the state has already collected multiple taxes at the gate. The business either borrows the money, embeds the finance cost in its price, reduces margins, delays investment, or moves activity outside the formal chain.
This is one reason our earlier work on broad, flat, low-rate and predictable taxes has argued that productive imports should not be used as a convenient revenue counter. A low, broad domestic tax base is economically healthier than extracting revenue from inputs before value is created. [14]
Measure the real border burden
The next phase of tariff rationalisation should therefore introduce a new policy measure: ‘Total Border Tax Incidence’. For every Pakistan Customs Tariff code, the government should publish in one place the customs duty, ACD, RD, federal excise duty, sales tax, Twelfth Schedule value-addition tax, section 148 income-tax collection, exemption or concession, refund treatment and average time to realise the credit.
That dashboard would immediately expose the difference between a zero customs rate and a genuinely low-cost productive import. It would also improve parliamentary oversight. The Tariff Policy Board could no longer assess a proposal in one silo while the Federal Boated of Revenue (FBR) recovers the same revenue through another statute.
The first policy test should be simple: no productive input should carry a non-creditable or minimum tax merely because it crosses the border. Raw materials, intermediate goods, capital equipment, technology-enabling imports and inputs for verified export supply chains should move towards zero or near-zero total border incidence. The rule should be available through registration, risk profiling and Pakistan Single Window—not through case-by-case exemption certificates.
Section 148 of the Income Tax Ordinance, 2001 should be redesigned accordingly. Productive imports by registered manufacturers, exporters and authorised industrial suppliers should be excluded from minimum-tax treatment and progressively from upfront collection.
Where tax is still collected from commercial imports, it should remain genuinely adjustable against actual income-tax liability.
The Twelfth Scheduless three percent value-addition tax should likewise disappear from productive inputs. Ordinary sales tax at import stage should operate as true VAT: immediate electronic credit, statutory refund deadlines and compensation where the state retains a verified refund beyond that period. A refund delayed long enough is an interest-free loan from business to government.
Revenue must move inland
The Ministry of Finance and FBR will understandably ask how the revenue is to be replaced. The answer cannot be to preserve an anti-export tax structure because the border is administratively easy to police. PIDE’s modelling recognises a static revenue loss from tariff reduction but estimates that higher compliance, less smuggling, lower transaction costs and growth can reverse part of it over time. [5]
The durable answer is domestic taxation after value is created: a broad, low-rate and genuinely value-added consumption tax; income taxation based on real net income rather than transaction proxies; documentation of wholesale and retail margins; digital invoicing; risk-based audit; and removal of exemptions that survive because politically connected sectors are easier to protect than to tax.
Customs should increasingly be judged by clearance time, valuation integrity, risk management, post-clearance audit, anti-smuggling performance and trade facilitation—not by how much income tax and sales tax it can collect before goods leave the port.
Protection should be earned, temporary and transparent
None of this requires Pakistan to abandon legitimate trade defence. Dr. Manzoor Ahmad has consistently stressed that integration and competition must coexist with safeguards against dumping, subsidies and genuine injury. [13] The National Tariff Commission should become stronger as permanent tariff protection becomes weaker.
Any exceptional protection should state its purpose, beneficiary, rate, duration, productivity benchmark and exit date. If an industry cannot meet the benchmark, protection should decline rather than renew automatically. A sunset clause is the dividing line between transition policy and rent.
The same principle applies within the federation. Provincial cesses and charges that function like internal border levies can recreate the fragmentation that federal tariff reform is trying to remove. We have separately highlighted this emerging problem in relation to infrastructure development cesses. [15]
The export test
Pakistan’s new tariff policy deserves support because it finally recognises a truth that successful trading economies learned long ago: imports and exports are complements. Exporters need imported machinery, specialised components, chemicals, synthetic fibres, software-enabled hardware and technology that cannot always be produced domestically at competitive quality or scale.
The reform will succeed only when the policy metric changes from the customs rate to the cost of getting a productive input into a factory. The government should annually publish not merely the average tariff, but the average ‘Total Border Tax Incidence’ on raw materials, intermediates and capital goods; the share of those taxes refunded within 30 days; the working capital released; the number of new exporting firms; and the change in export value-added.
The current transition has moved Pakistan in the right direction. Duty-free industrial imports have increased, visible tariff protection is being reduced, and the government has resisted—so far—a wholesale reversal under pressure from protected sectors. That is real progress.
The unfinished task is larger. A country cannot declare an input duty-free with one hand and continue treating the border as an income-tax and sales-tax collection point with the other. Customs tariff rationalisation must become import-stage fiscal rationalisation. Only then, will the reform move from a cleaner tariff book to cheaper production, new investment, broader export capability and sustainable revenue.
The decisive principle is straightforward: tax income when income is earned, tax consumption where consumption occurs, and do not tax the machinery and inputs of future exports simply because they are easiest to intercept at the port.
Endnotes
- Mubarak Zeb Khan, “Duty-free imports rise to $27bn under tariff reform drive”, Dawn, July 10, 2026.
- Ministry of Commerce, National Tariff Policy 2025-30.
- Federal Board of Revenue, Salient Features – Budget 2026-27, Customs Act 1969.
- Noorulain Hanif & Ahsan Abbas, “Macroeconomic Impact of Tariff Policies in Pakistan: An Empirical Assessment Ahead of the New Tariff Policy 2025-29”, Lahore Journal of Economics, Vol. 31, Issue 1, Summer 2026.
- Uzma Zia, “Rationalizing Pakistan’s Tariff Regime for Export-Led Growth”, PIDE Policy View Point No. 50, 2025.
- Islamabad Policy Research Institute, “Tariff Rationalisation in Pakistan”, Policy Paper, March 24, 2025.
- CDPR/IGC/World Bank, “Strategic Tariff Reform for Export-Led Growth in Pakistan”, follow-up note, June 2025.
- Jamil Nasir, “The Tariff Tripod of Pakistan: Protection, Export Promotion, and Revenue Generation”, The Pakistan Development Review, 59:3 (2020), pp. 517-551.
- Associated Press of Pakistan, “Ministry of Commerce hosts third meeting of Committee on tariff rationalization”, August 12, 2024.
- Federal Board of Revenue, Sales Tax Act, 1990, amended up to June 30, 2026; see section 3 and Twelfth Schedule.
- Federal Board of Revenue, Income Tax Ordinance, 2001, amended up to June 30, 2026; see section 148 and Part II of the First Schedule.
- Dr Manzoor Ahmad, “The urgency of tariff reforms”, Dawn, June 10, 2025.
- Manzoor Ahmad, “Trade, Exports, and Integration: Pathways to Sustainable Economic Growth”, PIDE, 2026.
- Huzaima Bukhari & Dr Ikramul Haq, Towards Broad, Flat, Low-rate and Predictable Taxes, Third Revised Edition, PRIME Institute, 2024.
- Dr Ikramul Haq, “Pakistan’s invisible tariff walls”, The Express Tribune, July 6, 2026.