The two most frequently used tools by the present government for raising new taxes and enlarging the tax base are regulatory duties on imports and withholding taxes on services. While the regulatory duties are claimed to be on “luxury” goods and thus only impacting the rich, the withholding taxes are stated to be for bringing more people under the tax net.
There are no follow-up figures to show if such measures achieve the stated objectives. On the other hand, there is ample evidence that these measures are counterproductive for economic growth, employment as well as exports. They are counterproductive because they are not what they are claimed to be. For example, if we look at the regulatory duties imposed over the past two years, it is clear that they are not on luxury items only, but cover all types of goods including raw materials for industry, essential goods as well as consumer goods. Thus their impact is not limited to the richer section of the society but they affect all including the very poor. A cursory look at the FBR website and the regulatory orders imposing the duties would clearly show this point.
The very first measure in 2015 was on 9th January when a regulatory duty of 20% was imposed on sugar. This was followed by a 25% duty on wheat in March 2015. A month later, on 30th April 2015, a regulatory duty of 7.5% was imposed on furnace oil. In June 2015, the ambit of regulatory duties was extended to hundreds of products, which included iron and steel bars and other construction material such as flat-rolled products and pipes, etc. When the annual budget was presented, the range of regulatory duties was increased to almost all products. Even after the budget, the practice of levying of regulatory duties continued throughout the next six months with the latest being on yarn and fabrics. Sugar and wheat are not luxury products. Similarly iron, steel and yarn are not luxury goods but are essential inputs for the local industry.
By increasing tariffs on import of raw materials, domestic industry was made seriously uncompetitive. For example, the10% additional tariff on yarn imposed from 1st November 2015 may have helped some inefficient yarn spinning units, but it considerably increased the costs for the value added sectors producing fine quality fabrics and knitwear. The policy-makers had to decide between opting for promoting the high value added sector where value addition can be more than 800 percent or favour the yarn sector where value-addition is less than 100 percent. It’s a no brainer that a product that earns more foreign exchange, creates more jobs and is less capital intensive should have been preferred but the decision was exactly the opposite.
In order to boost economic activity, most countries encourage construction industry as this brings a chain reaction giving a boost to employment. But if the prices of essential construction material are raised through raising tariffs, it becomes a serious disincentive. In June 2015, the government imposed 10-15% regulatory duty on iron and steel products and other construction materials like tubes, pipes and ceramic tiles. This protectionism provided the local industry an opportunity to raise its prices and thus restrict the growth of construction industry.
Even if the government’s claim is correct that the regulatory duties only impact “luxury goods”, it is not fair to give higher protection to the local producers of “luxury goods” as compared to those who produce goods for common use. The government should realise reduction of one percent of trade costs could add up to 2% in the value of exports. Thus frequent hikes of import tariffs in 2014 and 2015 meant a serious fall in exports. PML-N had been known for its openness. By shifting its policy towards greater protectionism, it is suffocating growth, restricting exports, making consumers pay more, promoting joblessness and pushing the country towards a pariah state status.
Another serious by-product of regulatory duties is a several-fold increase in smuggling. According to recent government figures, total value of smuggling prone 11 items now stands at $9 billion. Some experts estimate that total value of smuggled goods now stands at $15 to $20 billion on which the duty evasion would be around $4 billion per annum. This is an alarming increase over the last 15 years. Smuggling had been gradually coming down when the tariffs were being lowered through most of 1990s. However, since the reversal of reforms from 2008 onwards and increase in duties, volume of smuggling has multiplied several folds. Unless the government reconsiders its policy of enhancing duties through regulatory duties, smuggling would continue to flourish.
A parallel can be seen with the telecom grey traffic. In August 2013, when the previous government raised the minimum rate for international incoming calls to US 8.8 cents, the grey traffic started to soar and became more than four times the officially incoming calls. Not only it caused serious losses to the government revenues but also raised the costs of making telephone calls for overseas Pakistanis. However, when the current government repealed the previous government’s policy in June 2014, the volume of grey traffic started falling. If instead of levying regulatory duties, government was to reduce duties, it would curb smuggling business and increase its revenue.
If the government is keen on matching the GDP growth of its neighbours, it has to adopt their policies. Whenever regulatory duties were imposed in Pakistan, they adversely impacted exports. It happened in 1996 and 2008 when the PPP government resorted to such practices. The PML-N should not replicate those failed policies.Manzoor Ahmad, "How RDs hampering GDP growth, exports," Business Recorder. 2016-01-17.
Keywords: Economics , Income Tax , Human growth , Capital budget , Regulatory duties , Construction industry , Import Policy , Luxuries , Smuggling , FBR , PML-N