ABSTRACT

This research analyzes the position of zero-rating within Pakistan’s tax system, with specific emphasis on its use in export-oriented industries like textiles. Utilizing firm-level data from the year 2009-2023. Taking a rigorous empirical approach, using Propensity Score Matching together with fixed effects panel regression to estimate causal effects. The study seeks to understand the influence of zero-rating on export performance, local sales and total factor productivity taking into account raw material and energy costs as moderating factors. Findings reveal that zero-rating tax policy significantly enhance local sales of the benefited firms but has limited impact on export and productivity growth in the timeframe of observation. The taxation system of the country is still hampered by a restricted tax base, excessive indirect taxation, dispersed administration, and generalized evasion, which together weaken both equity and efficiency. The study concludes that while zero-rating may be a valuable policy tool for promoting export competitiveness, its long- term contribution to productivity and fiscal wellness is subject to far-reaching reforms that enhance tax administration, expand the base, and harmonize incentives with long-run economic growth goals.