Sunday June 23, 2024

Irrational duties

By Mansoor Ahmad
May 31, 2024
Headquarters of the Federal Board of Revenue in Islamabad. — APP/File
Headquarters of the Federal Board of Revenue in Islamabad. — APP/File

LAHORE: Customs duties are a major source of revenue for the Federal Board of Revenue (FBR) that usually weighs the duties’ impact on its revenue without evaluating their repercussions on consumers or industries.

In the past, we have seen that there was a heavy protective duty on polyester fibre, but the import of polyester yarn was duty free. This was illogical and was removed after a long time. Currently, duties on imported used cars are evaluated on the import tariff price fixed years back although car prices have increased exponentially in the past decade.

This has marginalized domestic-car assemblers that are forced to close their plants 15 days a month on average. Another anomaly is the import duty on tea and coffee -- two almost similar drinks with the consumption of the latter increasing rapidly among young people, who constitute around 65 per cent of the country’s population.

With changing demographics, slowly but surely, coffee penetration is also growing fast. There are multinationals and local brands that are involved in importing and assembling (including branding) tea in Pakistan; the same can also happen in the coffee business. The market is ready; the issue remains a high duty on coffee, which should be rationalized.

Duties on tea were reduced on the plea that such taxes encouraged the smuggling of the commodity in Pakistan. Instead of taking steps to curb smuggling, the duty was briefly reduced to zero. However, its smuggling still continued. The government then levied 11 per cent duty on tea imports plus an additional customs duty of 2.0 per cent.

As far as coffee is concerned, duties on coffee imported under a trade treaty with one country are zero, but the importer has to pay 2.0 per cent additional duty and 40 per cent regulatory duty. From all other destinations, customs import duties on coffee is 11 per cent plus 2.0 per cent additional duty along with 40 per cent regulatory duty (total impact 53 per cent). This high import duty has paved the way for dubious imports and smuggling through our land and sea borders.

Within coffee, the Pakistan market is dominated by instant coffee, which is showing promising growth potential while the volumes of fresh coffees are minimal. The numbers are growing fast, and growth is mainly emanating from young men and women from all strata of the population, which suggests that tastes are changing with a growing youth bulge.

Globally, 2.25 billion cups of coffee are being consumed every day. It is the second biggest commodity in trade, after oil in the world, and the global market size is expected to reach $85 billion by 2025. Pakistan is an emerging market for coffee and it needs to be tested by rationalizing the duty structure. The overall duties (customs duty, additional customs duty, and regulatory duty) on finished coffee products are at 53 per cent while on bulk imports, they stand at 28 per cent.

As seen in other sectors, higher duties on coffee have created a parallel (illicit) trade market. For example, there are smuggled international brands selling on retail shops at a price at which even coffee manufacturers cannot sell, as they comply with duties and taxes.

This is also a violation of Special Regulatory Order (SRO) 237, issued by the FBR in February 2019, which set specific requirements for the import of processed food products. This regulation aims to ensure that imported food items meet certain standards for labelling and halal certification, with the ultimate goal of protecting consumer health and curbing the import of substandard products.

It further directs that imported food products must have at least two-thirds of their shelf-life remaining at the time of import. To encourage local manufacturing and brand building, the government must consider reducing regulatory duty on bulk coffee imports. This will ultimately boost the government revenues at the end of the day. It should charge duties on imported used cars based on their current prices internationally because the duty is reduced on a per-month basis on used cars.