The unrestrained and distortionary high tariff regime as well as a skewed taxation structure is systematically suppressing our exports and deindustrialising the country unabated, adding to the ills of our already beleaguered economy.
Pakistan’s effectively applied tariffs are three times those of East Asia, twice the world average, and third highest amongst 68 countries with exports above $20 billion per annum.
Commenting on existing tariff regime in Pakistan, National Tariff Commission (NTC) said there was no tariff policy for last 71 years as ad hoc tariff setting lacked transparency as well as predictability. The import tariffs are easy to levy and administer than direct taxes. However, tariffs have become revenue generation tools rather than instruments of trade policy with the objective to achieve competitiveness and boost exports.
In the wake of focusing only on rent-seeking, selective concessions through Statutory Regulatory Orders (SROs) and seeking subsidies through lobbying are the only objectives of the powerful vested interests that become active in the corridors of powers on eve of every budget and presentation of trade policy.
For achieving limited goals, the tariff was always kept complex and prone to manipulations. For instance the costly raw material for industries always discouraged value-added industry. Without having economic rationale, the import tariff on raw material was slapped on higher side only for the purpose of revenue generation but no one assessed the losses it dealt to the growth of industrial sector of the country.
There is correlation between reduced tariff and higher exports as from year 2000 to 2004, the tariff were reduced, which led to an increase in exports.
Another imbalance exists in our policy formulation on the economic front as inherent bias continued against industries especially large-scale manufacturing as well as against small and medium enterprises. Chairman FBR Shabbar Zaidi conceded the country’s 70 percent tax was collected from industrial sector, while other sectors contribute much less, despite having a large share in the country’s gross domestic product (GDP). With this bias, the concept of equity in taxation burden cannot be implemented in Pakistan.
The federal cabinet approved formulation of new tariff policy and assigned NTC to come up with a new policy within next few months.
Subsequently, the NTC started consultation for placing new tariff policy and has so far come up with principles of the policy as the upcoming one would be based upon that tariff. It would be used for trade purposes instead of revenue generation, tariff simplification by reducing exemptions and concessions, cascading tariff structure with stages of processing of a product, strategic protection to domestic industry during infancy, and competitive import substitution.
The proposed tariff policy will be finalised till coming March 2020 for its incorporation into next budget 2020-21. The NTC has proposed phasing down the tariff in small stages till fiscal year 2023-24. As a result the duty slabs will be reduced from maximum 25 to 15 percent and minimum slab from 3 to zero percent.
Under the proposed tariff policy framework from 2019 to 2024, the NTC has targeted to reduce the maximum duty slab on account of custom duty (CD), additional customs duty (ACD) and regulatory duty (RD) from 25 to 15 percent, second slab from 19 percent to 10 percent, third from 11 to 5 percent and fourth from 3 to zero percent.
Chairperson NTC Robina Ather stated the tariff rationalisation would be done in a gradual manner by bringing a paradigm shift as the tariff would not be used as a tool of revenue generation anymore but it would be aimed at promoting trade.
Different stakeholders including cement sector, shipping sector, paper board, and glass industry have asked the government to rationalise duty structure on raw materials, plant, and machinery of their relevant sectors to ease the cost of doing business. Almost all sectors’ representatives demanded of the government to cut the cost of doing business in Pakistan as higher rates of energy (electricity, gas), provincial taxes, and levies were making them uncompetitive in international markets.
They questioned how the export proceeds will increase in Pakistan without any exportable surplus. They said only after the introduction of industrial, investment, and transportation/logistics policies, can the tariff policy play its role for making industrial sector competitive globally, enabling it fetching due share in terms of increasing exports.
Ather said there was a co-relation between reduced tariff and increased exports. Citing empirical evidence, she stated that exports actually increased when tariffs were slashed down from 2000 to 2004. One of the major reasons behind deindustrialisation in Pakistan was higher tariff regime as it increased cost of manufacturing.
The NTC would recommend incremental and gradual approach for rationalising the duty slabs. Their proposals were aimed at next budget but the RDs could be reduced before the next budget with the approval of the government.
The timelines envisaged by the NTC outlined consultations with stakeholders consultations would be done in January, while Tariff Policy Center would analyse all the proposals and inputs next month. The formulated proposals would be placed before the Tariff Policy Board for approval in March so that it could be incorporated in the budget 2020-21.
Under the institutional mechanism, the Tariff Policy Board will be headed by advisor/minister of commerce and minister for industries, secretary commerce, finance, industries & production, Board of Investment, chairman FBR, and chairman NTC will be its members.
The Tariff Policy Center will act as secretariat to Tariff Policy Board. The federal cabinet will be the authority on approving proposals related to RDs or Parliament in case of making adjustments in the rate of Customs Duty (CD).
Pakistan’s industry cannot compete without reducing the cost of doing business. The first and the foremost step towards this goal is the rationalisation of tariff regime followed by reduction in the cost of other inputs.
It is because in the presence of higher cost of doing business the exportable surplus at competitive price cannot be achieved. For increasing exports, tariff rationalisation will be the first step in the right direction.
The writer is a staff member