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New Tariff Policy – a formidable challenge

Federal Cabinet has approved National Tariff Policy 2019-24 to be implemented in a period of five years starting from the Budget 2020-21. Easy passing a policy but harder to put it in action. It is a major development to reduce the anti-export bias in our national Customs Tariffs. However, it would remain a formidable challenge finding a balance between revenue considerations and protections of local industry.

It is well acknowledged fact that if import tariffs employed effectively can play a vital role in optimal allocation of resources, protection of domestic industry, improve competitiveness, attract and protect investments.

Contrary to that, if employed excessively, the tariffs erode competitiveness of the industry by increasing cost of inputs, cause de-industrialization by making industrial investment less viable due to eroded competitiveness. It also helps, thus, breed incompetence by protecting inefficient producers, burdens consumers’ by making industrial products expensive.

Last two decades of economic performance has demonstrated that the country has witnessed de-industrialization. The share of industrial production has gone down from 26.4% of the GDP in FY 2010 to 20.3% in FY2019. Meanwhile, the share of exports dropped from 13.5% of GDP in 2010 to 7% in 2019. Higher tariffs and in the manner these tariffs have been repeatedly used as a weapon to raise revenues are partly to be blamed for de-industrialization and prevailing anti-export bias leading to inelastic exports.

During the last decade, all the 20 fastest export growth economies have reduced import tariffs whereas Pakistan has opted the opposite path with an increase of 11% in import tariffs. As per a World Bank report, Pakistan currently maintains the highest average weighted tariffs amongst the 70 countries having more than US$ 20 billion annual exports. Pakistan’s weighted average mean tariff of 12.7% whereas top 70 exporting nations is 2.7%, global average 2.6%, South Asian average 5.9%, ASEAN average 2.5%, China 3.8% and India’s 5.8%.

Due to the inability of tax machinery to collect direct taxes, reliance of Pakistan on taxes collected at import stage has been increasing. The tariffs collected at import stage now constitute around 48% of total tax revenue of the country compared with the export driven economies e.g. Malaysia has this share as 1.6%, Turkey 2.4%, Indonesia 2.6%, china 3.9% and India 12.8%.

The Federal Government Rules of Business 1973 stipulated the Tariff Policy and protection regime as the mandate of Commerce division. Hence, it is the Commerce Division that has been negotiating tariff concessions under bilateral and multilateral arrangements and formulating the Trade Policy; the tariffs being its primary instrument.

However, the onus of Tariff regime has always been with FBR due to ever growing revenue constraints. FBR, being purely a revenue collection agency, has used tariff setting as a primary instrument to meet its ever growing targets of revenue collection. This single track compulsion has often led to multiple layers of policy distortions which adversely effected country’s industrial competitiveness, higher import tariffs on imported raw materials, intermediate goods and machinery.

In pursuit of maximizing revenue collection, it resulted in a complex tariff structure loaded with multiple duty slabs, high tariffs and concessionary SRO’s. Not to mention that high tariffs incentivized increased smuggling, under invoicing and mis-declaration of quantity and quality of goods. Such hot pursuit of revenue maximization often led to intra-sector anomalies and discrimination like different tariffs for raw materials for industrial and commercial importers.

FBR, thus, assumed a pivotal position in tariff setting and most critical arm of national exchequer. The importance and power attached with tariff setting helped FBR to amass enormous power and influence in trade, industrial and any other economic policy initiative.

National Tariff Policy 2019-24 is an ambitious policy reform measure to reverse these administrative imbalances. It has noble objectives and principles in its spirits like improving industrial competitiveness, removing anomalies in the tariff structure. Its principles can hardly be disagreed like having tariffs as trade policy instrument, simplification, cascading, strategic protection and competitive import substitution.

The real challenge, however, would be implementation with its true spirit. Old habits die hard; the habit to hold the powers is harder to abandon. Currently, Ministry of Finance and FBR being its premier revenue collecting agency has most critical role to play. It would be a formidable challenge to reverse the decades’ old onus back to Ministry of Commerce from FBR amidst the hovering fiscal deficits, severe hard economic choices and tough stabilization measures in progress under IMF Stabilisation programme.

The capacity and capability of proposed Tariff Policy Board to discharge the tough balancing act of trade and competitiveness promotion while maintaining an effective mechanism for steady flow of revenues from imports until direct taxation is sufficiently developed would be an uphill task too. But all said and done, if implemented with spirits and heart, this policy may address many age-old anomalies and usher more inclusive and balanced economic policy making process.

(The writer is political economist and a Lahore-based Urdu columnist)

Khalid Mahmood Rasool, "New Tariff Policy – a formidable challenge," Business Recorder. 2019-11-26.
Keywords: Economics , National tariff policy , Economic policy , Customs tariffs , Domestic industry , Industrial production , Trade policy , Policy reforms , Revenue collection , Industrialization , GDP , FBR , IMF , 2019-24