Raise in regulatory duty

The Economic Co-ordination Committee (ECC) that met under the chairmanship of Advisor to the Prime Minister on Finance Shaukat Tarin decided to raise regulatory duty on import of several items. It maybe recalled that in July last year the government had imposed regulatory duty on 379 non-essential and luxury items. The objective at the time was two-fold.
First, to reduce the pressure on the then precarious foreign exchange reserve position as an increase in duty of non-essential or luxury items would, it was argued, reduce their demand in the local market with a corresponding decline in the quantity of imports thereby saving valuable foreign exchange. And, second, to raise revenue in an effort to reduce the 7.4 percent 2007-08 budget deficit that was acknowledged as one of the primary reasons for galloping inflationary pressures.
The recent decision taken at the ECC meeting to raise regulatory duty, therefore, is indicative of two rather disturbing facts: (i) that the foreign exchange reserve position remains precarious in spite of the 7.6 billion dollar stand-by arrangement with the International Monetary Fund out of which around 3.1 billion dollars had already been released to the government in November; and (ii) there are concerns over meeting the rather ambitious 4.2 percent budget deficit target agreed with the IMF as against the 7.4 percent achieved in 2007-08.
Pakistan has extremely porous borders. Thus any attempt to subsidise prices of essential items in Pakistani markets have, invariably, led to smuggling to neighbouring countries with devastating implications, namely, that our government is subsidising prices of essentials for the citizens of neighbouring countries.
Policing our borders to stop smuggling has been a task that is simply too challenging given our long porous borders with India and Afghanistan. Thus the only viable policy option available to the government is to ensure that the price of essentials not be subsidised to the extent that smuggling becomes attractive.
And, by the same logic, the government must ensure that the levy of duty is not so high that it becomes profitable for smugglers to smuggle these items into Pakistan. Thus one would have hoped that the ECC had deliberated on the price of these products in neighbouring countries and ensured that the domestic price not be too much above that prevalent in India or Afghanistan which would encourage smuggling rather than summarily raising the regulatory duty on some items.
Be that as it may it is significant to note that our governments, past as well as present, have exhibited a tendency to tax those sectors that are relatively easy to collect from.
Thus increasing duties and sales tax has become the norm as a means to raise revenue - taxes that are essentially regressive in nature whose incidence is higher on the poor relative to the rich. What Pakistan needs is tax on say income of the rich landlords, not of the poor and medium income farmers, as well as on the stock markets in an effort to raise tax collections in an equitable manner.