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Move to cut tariff slabs

Move to cut tariff slabs

THE Federal Board of Revenue is working on a raft of tariff liberalisation proposals for the 2015-16 budget under an ongoing phased programme of tariff reforms. These primarily include reducing the number of maximum tariff slabs from six to five, and the maximum customs duty to nearly 20pc from 25pc.

However, economists and industry analysts say unless these proposals are accompanied by precise policy guidelines and objectives, any tariff liberalisation would prove counterproductive. They believe that these half-cooked measures would discourage new investment and manufacturing.

They argue that tariff reforms involve thorough research on a product-line basis. The changes being proposed in the structure of duties and taxes by officials unaware of market realities, may result in slowing or closing down an industry .

As per the proposed original plan, the Federal Board of Revenue (FBR) is considering cutting the maximum tariff from 25pc to nearly 20pc and increase the minimum rate from 1pc to 3pc. Last year, the maximum tariff of 30pc was scaled down to 25pc, except for the automobile sector. Tariff slabs were also reduced from seven to six.

In the first phase of the tariff reforms, the zero tariff slab was replaced with 1pc to generate revenue. However, a new fifth schedule in the Customs Act was introduced to protect sensitive imported items. From July 2016, the third and last phase of the tariff reforms will be implemented when the number of slabs will come down to four from five.

Within the FBR, there is a strong support for a maximum of three tariff slabs: 5pc (raw materials), 10pc (intermediary goods) and 20pc (consumer goods). However, there might be different points of view on the three-slab mechanism because it will be not be viable to treat a certain category of products with one dimensional approach.

All this exercise is being done by a single customs officer at the FBR, who has scores of other responsibilities as well.

Contrary to the current practice in the tax authority, tax experts argue that determining the optimal tariff implies switching the existing tariff structure from nominal to effective protection rates (EPR) for the domestic industry. The EPR calculation requires detailed cost data analysis of every product, covering all aspects of manufacturing, from investments to the cost of production and cost of sales.

The effective rate of protection can be calculated only after doing a comparison with the landed cost of imported goods. The element of duties and tax in investments, raw materials and the landed cost of raw materials need to be compared. This exercise will have to be done individually for all locally manufactured products.

The task of determining the EPR was assigned to the National Tariff Commission (NTC) recently, but it faces noncooperation from the customs department in sharing import data. And the NTC itself lacks proper technical expertise.

A customs officer who deals with tariffs at the FBR said a simple, cascading tariff structure can provide a simplistic solution. But it would not serve the individual needs of all the manufactured products, as the dynamics of every commodity is different. Therefore, applying a single rule across the board can backfire.

The customs tariff represents all official policies, such as those for investment, power, education, health, tourism, textiles, automotive, exports, petroleum, energy conservation, food security and agriculture etc.

Therefore, tariff adjustments must have specified objectives. Irrational adjustments often create distortions in tariff or fiscal anomalies. For instance, under the education policy, books and other printed materials are zero-rated, whereas a customs duty of 25pc is charged on paper.

There is a long list of such distortions that need to be addressed while reviewing tariffs, and government policies need to be shaped by tariff as well as non-tariff measures.

The government has undoubtedly eliminated quantitative restrictions and para-tariffs in the recent past.

However, the number of statutory regulatory orders (SROs) and regulatory duties have increased manifold. Recently, the government imposed regulatory duties on several hundred products to raise revenue and provide protection to the local industry. There is also a need to ensure that protectionism does not lead to rent-seeking.

Instead, wherever necessary, World Trade Organisation-compliant defence laws — such as those for anti-dumping, countervailing or safeguard measures — could be enforced. All SROs favouring specific lobbies and not based on merit, should be abolished in the budget.

In successful countries, tax policies are formulated to spur investment, production, trade and economic growth. They are not focused on revenue collection.

The government needs to plug loopholes in the tax system. There are approximately Rs3trn worth of duty-free imports per annum.

Some tax experts suggest that an office of the tariff directorate general may be created on the pattern of customs valuation to work out the EPR on a product by product basis and recommend actual tariff rates to make industries more efficient and competitive.

Published in Dawn, Economic & Business, May 18th, 2015

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