PRIME’s new report, “Customs Tariff Reforms: one step forward, two steps back” finds that country is lagging to diversify its produce, markets and our domestic industries remained inefficient on the back of insignificant tariff reforms. Pakistan Tehreek-e-Insaf (PTI) government came to power with the reformative agenda to augment industrialization and exports of the country but “Make in Pakistan” remained a slogan because contemporary tariff structure restricts innovation and efficiency.
“Customs Tariffs are often used as a tool for protection of domestic industries and revenue maximization. Effectively, they work against domestic industry by shielding them from innovation and competitiveness. While the government may compensate for its revenue targets from import taxation, it stunts economic growth, and hence future revenues”, said Ali Salman, Executive Director PRIME
Government took a policy change in 2019 by assigning responsibility of customs tariff determination to Ministry of Commerce by establishing tariff policy board and tariff policy center in National Tariff Commission (NTC) to put forth proposals on the back of research and consultation with stakeholders. Subsequently, National Tariff Policy 2019-24 was formulated and customs duty on raw materials were slashed for some sectors. However, the impact remained insignificant from the raise in regulatory duties by Federal Board of Revenue (FBR).
The report highlights that imports in country are subjected to myriad duties for protection of domestic industries from international competition and revenue generation to manage budgetary requirements. In trade policy, revenue generation has taken precedence over long-term sustainability and industrial competitiveness, which can be illustrated by the fact that revenue collection at the import stage has stood above 40% of the total FBR collection, i.e. Rs 2,129 billion was collected at the import stage out of total FBR’s collection of Rs 4,732 billion in FY21.
Contemporary tariff setting is based on a principle of cascading i.e. tariffs on raw materials are low, on intermediate and final goods are high. Resultantly, consumers have to buy domestically produced low quality products at high prices and local firms do not innovate to become competitive internationally because of their focus on domestic sales. Therefore, import substitution policy actually becomes export substitution policy.
Moreover, the government has promulgated 43 SROs in the last three years while the PML-N government had promulgated 53 SROs in five years, which created uncertainty and difficulty in the implementation of tariff policy along with making the system more complex.
The report highlights that PTI government has managed to sign China Pakistan Free Trade Agreement phase II but progress on other bilateral and multilateral trade agreements with Asian tigers, Central Asian States, and decision on joining Regional Comprehensive Economic Partnership (RCEP) has been lagging, which has restricted exports to conventional destinations
It has been globally acknowledged that higher the number and amount of taxes, higher will be the tax avoidance. Similarly, high tariffs have contributed to under-invoicing, mis-declaration of quality and quantity of goods and more importantly smuggling, which is a signal that tariffs are priced too high for customers.
Report suggests that country’s trade policy needs reforms such as formulation of comprehensive trade policy, tariff restructuring, rescinding import substitution policy and moving away from using tariffs as revenue generation tool to augment competitiveness of domestic industries and exports of the country.