Under EFS, how much output can I sell in the local market and what duty, tax and surcharge apply?

An Export Facilitation Scheme (EFS) user brings in yarn, dyes, chemicals and other inputs without paying duty and taxes because the output is meant for export. Chapter XL of the Customs Rules, 2001 still lets part of that output be sold in Pakistan. The price of doing so is that the goods are taxed as if they had just been imported, and anything above a 20 percent share also pays a surcharge.

What does the law say?

Why local sale is restricted. Rule 880(1) lets a user acquire input goods “without payment of customs duty, Federal excise duty, sales tax, or withholding tax” as per its authorization. Rule 883 then requires those inputs to be used within a set utilization period (60 months for Category A, 48 months for B1 and C1, 24 months for B2 and C2). Local sale is the exception, not the rule.

Rule 886 sets out five situations:

Sub-rule	What is sold locally	What is paid
886(1)	Up to 20% of output goods made from input goods	Leviable duty and taxes, assessed on a Goods Declaration as if the goods were imported in that condition
886(2)	Output above the 20% share, where the user is unable to export	The same duty and taxes, plus a surcharge of KIBOR plus 3% per annum on the value of input goods used in those goods
886(3)	Factory rejects or B grade goods	Leviable duty and taxes, if any, assessed as if imported
886(4)	Wastage within the Analysis Certificate	No duty and taxes if destroyed before an officer not below Assistant Collector, or on payment of federal excise duty and sales tax before removal
886(5)	Wastage above the Analysis Certificate limit	Duties and taxes on the input goods plus a surcharge of KIBOR plus 3% per annum

Sales under 886(1) and 886(2) are each subject to the satisfaction of the Regulatory Collector. Rule 886(6) adds that where the goods or input goods are banned under the import policy order, domestic sale needs the approval of the Ministry of Commerce.

How does it work in practice?

Each local sale goes through a Goods Declaration, the same document used for imports. The duty and taxes are worked out on the output goods in the condition they are sold, not on the yarn or fabric originally brought in. For a weaving unit that means the finished grey or processed cloth is assessed as if it had arrived at port.

The surcharge in rule 886(2) and 886(5) is different. It is charged on the value of the input goods used, not on the value of the cloth sold.

Unused inputs. Rule 887(1) gives the options for inputs that are not consumed, each with the Regulatory Collector’s approval:

• carry forward into the next year on submission of the reconciliation statement;
• transfer to another authorized user before the end of the utilization period, without payment of duty and taxes;
• domestic sale after the utilization period ends, on payment of duties and taxes “and a surcharge of KIBOR plus 3%” (banned or restricted goods only if the Ministry of Commerce authorizes it);
• re-export, if allowed under the Export Policy Order;
• destruction, if the goods are not fit for consumption or sale.

Output that cannot be exported. Rule 888 allows un-exported output goods to be transferred to another user or destroyed if unfit, again with the Regulatory Collector’s approval.

Worked example (illustrative figures)

A Category B1 weaving mill in Faisalabad holds an EFS authorization. In one year it weaves 200,000 metres of fabric from imported polyester yarn.

1. Limit under rule 886(1): 20% x 200,000 metres = 40,000 metres can be sold locally at duty and taxes assessed as if imported.
2. A local buyer wants 55,000 metres. The extra: 55,000 minus 40,000 = 15,000 metres falls under rule 886(2).
3. Suppose the yarn and other inputs used in those 15,000 metres were valued at Rs. 6,000,000.
4. On all 55,000 metres, the mill pays duty and taxes assessed on the fabric as if imported.
5. On the 15,000 metres, it also pays a surcharge of (KIBOR plus 3%) per annum on Rs. 6,000,000.

Two numbers are missing from this example on purpose. The customs duty rate for fabric sits in the Customs Tariff, which is not in this corpus, and KIBOR is a market rate that the rule does not state. Rule 886 also does not say over what period the “per annum” surcharge runs, or whether the 20 percent is measured per year, per authorization or per consignment.

What if …?

What if some of the cloth is B grade? Rule 886(3) deals with factory rejects and B grade goods separately, on duty and taxes assessed as if imported. The rule does not tie this category to the 20 percent share or add the surcharge to it.

What if wastage is higher than the Analysis Certificate allows? Rule 886(4) says no wastage is allowed except as determined in the Analysis Certificate. Under rule 886(5) excess wastage may be sold locally, with the Regulatory Collector’s permission, on duties and taxes on the input goods plus the KIBOR plus 3 percent surcharge.

What if an export order is cancelled and yarn is left over? Rule 887 applies. Transfer to another authorized user before the utilization period ends is the only listed route that expressly avoids duty and taxes.

Common mistakes

• Treating 20 percent as a free allowance. Rule 886(1) still requires full duty and taxes as if imported. The 20 percent only marks where the surcharge starts.
• Calculating the surcharge on sale value. Rule 886(2) applies it to “the value of input goods used in the output goods”.
• Selling unused inputs locally before the period ends. Rule 887(1)(c) allows domestic sale of unused inputs only after expiry of the utilization period.

What to check in the official text

Read rules 880, 883, 886, 887 and 888 in Chapter XL of the Customs Rules, 2001. This corpus holds the rules as updated to 30 June 2023. The Customs Tariff rates used to assess duty, the KIBOR figure and any Board orders on the Goods Declaration procedure for EFS domestic sales are not held here.