Misguided duties

Finally there is some life in the finance department. Don’t mind if it is same old stuff. The press conference in the FBR office was followed by notification of imposition of regulatory duty ranging between 5-80 percent on 713 non-essential import items which includes an array of new items.

Dar must be excused for being confused these days, with one foot in the NAB courts, other in the ministry. The objective of the exercise seems bordering on confusion too. Is it aimed at enhancing tax revenues or curbing imports? On the face of it, it looks a repetition of mini budget announced in October 15 where government imposed regulatory duty on a few items and enhanced custom duty on thousands of items to raise Rs40 billion.

The main difference between then and now midyear interventions is that, the objective back then was clearly aimed at raising revenues. This time around, it seems muddled around revenue aspiration disguised under the wrapping of curbing imports.

BR Research opines there would be negligible impact on import demand, if any, due to the imposition of import duty. Yes, a few billion rupees in additional revenues would be fetched, if smuggling is not incentivized. Demand elasticity for non-essentials is low as products are either consumed by the affluent class or there is no domestically produced alternative. If the objective is to curb demand, enhance duties on essentials!

Take the case of furnace oil for instance, where the RD is increased by 2 percent. Would there be any impact on demand? Not likely; as it is used for power generation with no alternative option. But this may increase revenues, for sure. Had the government increased the tax on petrol, it could have had some impact on demand. This column has repeatedly advocated higher petroleum prices, but the politics of such a move seem to have kept the government uninterested.

The point is that the demand elasticity is higher on products which are in use of common man while those products which are either in use for production of final product (such as FO) or consumed by rich (such as 1300 cc plus imported cars) have inelastic demand. Similarly, there would no impact on demand on imported white goods as masses use domestically produce items and those who chill drinks in Kenwood or Samsung refrigerator may not even care about price tag.

Thus, RD on many of the items may not have any impact on demand behavior as such. Yes, government may fetch Rs30 billion on duties to marginally reduce fiscal deficit but the objective of curbing imports, if there ever was one, will remain elusive.