National trade policy ineffective in simplifying tariff structure: report

ISLAMABAD: The National Tariff Policy (2019-24) was a step in the right direction but remained ineffective in removing rigidities and simplifying the tariff structure, said Policy Research Institute of Market Economy (PRIME).

PRIME released its report titled, “An Empirical Critique of National Tariff Policy 2019-24”, which noted that a complex tariff structure causes delays and inefficiencies in the promotion of manufacturing exports from Pakistan.

The frequent changes in tariff structure in Pakistan can be attributed to the complex and fragmented regulatory framework of controlling trade in the country.

The frequent changes in rules and regulations can be driven by various factors, including political considerations, pressure from special interest groups, and short-term revenue goals, rather than a coherent long-term strategy. This, in turn, hinders the achievement of trade policy objectives, such as promoting industrialisation, exports, and consumer welfare.

The complex structure of Pakistan's trade regulations does not provide a level-playing field to all businesses. Big businesses and influential stakeholders benefit from the complexity of the system, the report noted.

Pakistan's customs structure also favours a few oligopolistic industrial importers. These importers gain undue profits by using complicated tariff structures in their favour.

The NTP 2019-24 became dormant soon after its enactment in 2019 as the Federal Board of Revenue (FBR) continued to use imports as a revenue measure. Import duties contribute 24 percent to indirect taxes, and 75 percent of custom duties are being collected from 15 product groups. The FBR, Ministry of Commerce, and regulatory bodies are trying to manage imports with cumbersome and vague procedures of imposing and availing exemptions given in the fifth schedule.

The report noted that NTP 2019-24 outlined a complex formation of the tariff board. The Tariff Policy Board, due to its structure and voting pattern, remained ineffective and mostly inconclusive in taking timely decisions. Pakistan's trade policy framework is complex, with multiple non-tariff barriers (NTBs) and tariffs affecting international trade.

The government aims to gradually remove protectionist policies to address market failures. However, high tariff rates, complexity, and corruption lead to under-invoicing and smuggling, which are some of the challenges the government tried to correct through National Tariff Policy 2019-24. National Tariff policy used cascading as a principal objective to protect the local industry. After analysis, it appears that the policy to protect local industry is curbing trade in Pakistan and promoting a rent-seeking culture.

Cascading principle is having a selectivity bias as small and medium industries are unable to avail duty exemptions. For example, iron, steel and paper commercial importers are benefiting from duty exemptions. This report indicates that the SRO culture and exemptions given in the fifth schedule have increased the complexity of the tariff structure in Pakistan.

Multiple rates and non-tariff barriers (NTBs) affect international trade in Pakistan. Custom duty continues to be the major revenue spinner. Sales tax on imports contributes significantly to the total sales taxes in Pakistan, with a 61 per cent share in fiscal year 2022-23.

Pakistan is passing through a low growth phase in its economic history. The average GDP growth rate is 2.64 percent in the last five years. The GDP growth rate was -0.94 percent in 2019-20 and -0.21 percent in 2022-23. In a country where population growth is 2.55 percent, this is an alarming situation. During the same period, inflation rates were the highest. Trade is an opportunity that can generate growth in low-performing sectors, especially large-scale manufacturing. Pakistan's exports value for 2023 is Rs6.8 trillion, and imports stand at Rs13.4 trillion. Trade openness, on average, stands at 33 percent of GDP. After liberalisation of the economy, the share of trade in GDP has not increased, the report noted.

The report also highlights that there is a need to increase the import base as 43 percent of the imports are in the exempted products list. It is further noted that around 71 percent of customs duty were collected from 10 product groups. In year 2022-23, the base of dutiable imports further shrunk to 18 percent (FBR year book 2022-23).

The report analyses the tariff structure and its impact on trade contraction in Pakistan. The National Tariff Policy 2019-24 prescribed departing from using tariffs as a revenue collection measure, but that specific policy proposal was not put in practical use. As such, the impact of its lopsided tariff structure—the number of tiers and slabs—proved to impede industrial growth while causing delays and inefficiencies in the promotion of manufacturing exports from Pakistan.

The report recommended for streamlining the tariff structure by reducing the number of tiers and slabs. One product, one duty rate may be the golden principle to follow. There is a need to remove all the anomalies and exemptions. SROs may be issued only in extraordinary times. Change in custom duties, regulatory duties and additional regulatory duties through a consultative process must be time bound.

It further recommended for rationalizing tariffs to ensure balanced protection for domestic industries while avoiding high levels of protection that can lead to inefficiencies and gradually reduce tariffs to encourage competition, increase efficiency, and promote trade.

For Pakistan’s trade policy to assume a robust framework, the report recommends the simplification and gradual reduction of tariffs. Furthermore, a review every 10 years of the tariff policy is recommended for the tariff policy to remain relevant and effective in achieving its objectives.

During the last five years, distortions in tariff policy have increased significantly. It has restricted trade and adversely affected growth in Pakistan. Using petroleum products, chemicals and minerals for revenue collection is a hindrance in becoming a part of global value chains. Frequent changes in tariff structure and rates are another area which needs the attention of our policymakers.

“Empirical evidence proves that a uniform tariff rate is the most efficient way to handle trade policy. Optimizing revenue would be easier at a uniform rate rather than calculating custom duties at different rates. One can calculate the nominal protection rate, but it would be challenging to calculate trade intensity and effective tariff rates,” concludes the report.

Dr Ali Salman, executive director at PRIME, while speaking at the occasion said that we should stop using custom tariff and import taxation as a revenue tool, and should use this as a tool of industrial policy.

The government’s imposition of high tariff rates and Non-Tariff Measures (NTMs) on certain products would not completely discourage their consumption. Instead, a preference for under-voicing and smuggling over regular channels will materialise.

Parliamentary Secretary Dr Zulfiqar Ali Bhatti spoke about how aid categorically impedes economic growth, and recommending trade volume as an indicator of prosperity.

Copyright Business Recorder, 2024