The duty controversy

The controversy on the imposition and enhancement of regulatory duties and levies on a number of items for curtailment of imports seems to have deepened with the blockade of the Federal Board of Revenue's proposal by the Commerce Ministry in this regard. The situation highlights the fact that our policymakers start something before it is appropriate and advisable, or even permissible. The current situation, where a strategy aimed at containing the widening the fiscal deficit is absent, is a strong case in point.
According to a Business Recorder exclusive, Commerce Secretary Younus Dhaga has argued that his ministry has taken this decision because the ministry was not taken on board before it was brought before the Cabinet's Economic Co-ordination Committee - the highest forum of economic policymaking in the country.
The report says that the Revenue Division had informed the ECC two weeks ago that in order to improve the balance of payment position by reversing the trend of widening the trade deficit, the ECC in its meeting in the first week of October had approved the proposal on increasing or levying regulatory duties ranging from 10 percent to 30 percent on a number of "non-essential" items not produced locally. Consequently, the FBR issued SRO 1035(1)/2017 of October 16, 2017 in terms of Section 18(3) of the Customs Act, 1969, resulting in the levy of regulatory duty on 27 new items (137 tariff lines) and increase of the duty on 31 existing items (219 tariff lines).
A large number of representations were said to have been received by the FBR from different stakeholders in this regard. Simultaneously, local manufacturers of items approached the FBR with proposals for increase in regulatory duty on import of certain locally produced goods to encourage import substitution. Some trade associations approached the Standing Committees on Finance of the two houses of parliament. In 41 representations, importers and local manufacturers sought removal or reduction or partial exemption from regulatory duties, claiming, inter alia, that the products are input goods for their industry. In 12 representations, the local manufacturers sought protection against cheap imported goods through the imposition and enhancement of regulatory duties. Certain anomalies in the existing duty structure were also identified in some representations with a request for rationalization.
The secretary of the Commerce Division is said to have stated that they supported the proposals regarding withdrawal of regulatory duty and its reduction on the items respectively. However, they were not in favour of the proposed enhancement and imposition of the duty on items mentioned, as there had been no prior consultation with the Commerce Division. After a detailed discussion, the ECC deferred consideration on increase in the regulatory duty and its imposition, with the direction to the Revenue Division or the FBR to consult the Commerce Division prior to submission of its proposals to the ECC.
There are no two opinions about the fact that imposition of new and increase in the already existing taxes/levies may make local industries less efficient due to reduced competition and encourage smuggling. Increased tariffs could lead to trade wars with exporting countries countering with their own tariffs on imported products. The most dangerous pitfall associated with import-curbing policies is the raise in the cost of doing business for exporters since counterparts reciprocate with their own hostile tariffs. This could be in addition to the increased prices of imported inputs that exporters use in manufacturing, compromising the quality of goods as local industries look for ways to cut production costs (our exporters have been consistently raising this point). The position taken by the commerce secretary appears to be quite plausible. After all, international trade is not easy. The controversy is a valuable lesson for our policymakers. They need not treat the commerce secretary's decision as an act of unwarranted belligerence or expression of an inter-ministerial tiff. In the meantime, the FBR is required to do some creative thinking to increase revenues, as making imports costly alone will be no answer to Pakistan's balance of payments challenge.