Growth in customs duty

The recently announced mini-budget designed to overcome the 40 billion rupee shortfall in the first quarter of the current fiscal year included an increase in customs duty on 350 imported items by one percent, regulatory duty from 5 to 10 percent on 61 items exempted from customs duty and a rise from 10 to 15 percent on 289 items. An increase in federal excise duty on cigarettes and fixed duty on import of used cars of engine capacity 1000cc and above. Given, that the sales tax at the import stage is paid on the customs and federal excise duty paid value and, that advance income tax is collected on the value of imported product plus all import tariffs. There has therefore been a revenue bonanza in all the different heads of taxes. In actual terms, customs duty collections for December 2015 were 39.3 billion rupees (as opposed to 27 billion rupees collected in December 2014), and sales tax collections were 319 billion rupees July-December 2015 as opposed to 274 billion rupees in the comparable period of the year before.
In its over-arching objective to raise revenue, the Finance Ministry levied a one percent customs duty last year and raised it to 2 percent in the budget for 2015-16. The December mini-budget witnessed an additional one percent increase; consequently, at present, 350 items are subjected to a 3 percent customs duty, ie three times the rate last year. In its defence the Ministry of Finance claims that the increase in duty (customs and regulatory) is on luxury items alone. The use of the term luxury goods brings to mind the rich yet this is not the case given that the imported items on which the customs duty has been levied are purchased by lower middle to middle income levels as well. In other words, while these items were not in use by the vulnerable or those with incomes below the minimum wage yet the rich consumers accounted for a very small percentage and the tax has no doubt eroded the income of the middle classes.
The government has also repeatedly cited the low rate of inflation as an outcome of its policies and an indication that the impact of the additional revenue measures on prices has been minimal. While admittedly the rate of inflation is declining due mainly to the decline in the international oil prices, yet it is relevant to note that only a handful of the imported items on which the additional customs/regulatory duty has been levied are used in the calculation of the consumer, sensitive and the wholesale price indices. Thus, while there is clearly an erosion of the value of the income earned as a consequence of the additional levies yet they are not components of the inflation calculation.
The levy on used cars has been imposed at a time when the auto policy is still not approved and is currently being debated by the stakeholders. Those who represent the used car business expressed their concerns at this levy and argued that this will benefit the existing car assemblers who have consistently failed to meet their agreed targets with respect to increasing the use of indigenous as opposed to imported material. They further maintain that the tax would further negatively impact on the middle income earners who are increasingly opting for used cars.
It is unfortunate that overestimation of the budgetary revenue, cited by government as a ploy to motivate the Federal Board of Revenue staff to perform better, has implied mini-budgets or in other words the price of FBR poor performance is being paid by the middle class year after year. In addition, the focus has been on the ease of collections. This accounts for the heavy reliance on taxing petroleum and its products, on withholding tax (which is passed on to the consumers and therefore is technically not a direct tax but is so defined by the FBR), and redefining non-tax components as other taxes. It is about time the government focused on improving the performance of FBR as opposed to taxing the public to hide its inefficiencies.