Commerce Division and Federal Board of Revenue (FBR) are likely to lock horns on the long-awaited draft National Tariff Policy in the federal cabinet meeting on Tuesday (today) as both have extensive differences on the tariff rationalization plan and mandate, well informed sources told Business Recorder.
A number of meetings on this issue have been held at different fora that included the presence of the Prime Minister. However, the stakeholders have failed to evolve consensus on tariff rationalization mechanism and schedule.
The National Tariff Policy will be employed as an instrument of trade policy rather than revenue. The tariffs will be leveraged for creating the right balance between trade liberalization and time bound protection. The tariff structure will be simplified by reducing exemptions and concessions.
Commerce Division sources said argues that under the Federal Government Rules of Business, 1973, the Tariff Policy and protection regime is its mandate. Accordingly, Commerce Division has been administering the trade defence laws (related to anti-dumping, safeguards and countervailing duties through the National Tariff Commission, negotiating tariff concessions under the bilateral and multilateral arrangements) and formulating the National Tariff Policy, of which tariffs are the primary instrument.
However, over the years, due to revenue constraints, the role of tariff setting has been gradually assumed by the FBR, which has employed it as a revenue instrument, thereby creating multiple layers of policy distortions and adversely affecting the export competitiveness.
According to sources, there are several issues created by the current tariff regime: (i) employment of import tariffs as a revenue tool, has created distortions and affected the competitiveness of manufacturing, especially the export-oriented sector, the highest import tariffs on imported raw materials, intermediate goods and machinery has increased the cost of inputs; (ii) the sustained high level of tariff protection has created inefficiencies in the manufacturing sector, which is unable to protect its share in the domestic market, not to speak of competitiveness in the global market; (iii) high tariffs have created an anti-export bias, as the producers of goods find export markets less attractive than the protected domestic market. The burden of the protection in borne by the domestic consumers since domestic prices for the protected items are maintained above international market prices; (iv) multiple duty slabs, high tariffs, concessionary SROs and regulatory duties have made the tariff structure complex; (v) high tariffs have increased the incentives for smuggling, under-invoicing and mis-declaration of quantity and quality of goods; (vi) there are intra-sector anomalies and discriminations since for several raw materials the tariffs for industrial and commercial importers are different. It has created bias against the SMEs who cannot import raw materials themselves and rely on commercial importers for sourcing their inputs; (vii) frequent imposition of regulatory duties has made the tariff structure inconsistent and unpredictable, which hinder investment decisions; and (viii) the replacement of zero duty slab, covering, primarily the raw materials and machinery, with 3 per cent slab (plus 2 per cent additional duty) that has adversely affected the competitiveness of the manufacturing sector.
The National Tariff Policy aims to achieve the following: (i) to improve competitiveness of manufacturing sector including exports, through duty free access to imported raw materials by rationalizing the tariff structure; (ii) to increase employment opportunities by attracting efficiency- seeking investment in the manufacturing sector by making tariff regime transparent and predictable; (iii) to lessen the distortions in the domestic price structure and improve consumer welfare by reducing the burden of excessive protection; and (iv) to remove anomalies in the tariff structure, which is causing distortions between sectors and in the value chain of the same sectors.
The sources said, in the National Tariff Policy, the principle of vertical consistency through cascading (increasing tariff with stages of processing of a product) will be retained so that at any point in time, tariffs on inputs are lower than (or at least equal to) the tariff on the finished product. Besides, the steepness in escalations of tariffs will be reduced.
In order to achieve the objectives , Commerce Division has proposed the following tariff policy reforms: (i) the policy recommendations will be implemented in a period of five years starting from the budget 2020-21; (ii) the tariff slabs will be simplified based on the principle of cascading; (iii) tariffs on materials, intermediate and capital goods will be gradually reduced; (iv) the additional customs duty and regulatory duties will be gradually reduced; (v) the difference of rates of tariff for the commercial importers and the industrial users of raw materials, intermediate and capital goods will be eliminated to reduce misuse of such differential and to provide access to such essential materials for SMEs; and (vi) the nascent industry will be provided time-bound protection, which will cover the payback period of financing and investment. The protection will be phased out gradually to make the protection regime predictable and facilitate the investment decisions. Such protection levels will be provided through investment policy.
In order to implement these policy recommendations, a Tariff Policy Board (TPB) chaired by the Commerce Minister/ Advisor, with Minister fro Industries and Production, Secretary Commerce, Secretary Finance, Secretary Industries and Production, Secretary BoI and Chairman NTC as its members will be created.
FBR, in its comments has stated that the draft policy has recommendations whose implementation thereof would result in revenue loss to the tune of Rs 220-250 billion in FY 2020-21 and Rs 270-320 billion in FY 2021-22.
It says that the draft national tariff policy suffers from serious deficiencies/infirmities (i.e. mis-identification and over-weighting of reasons for decline of exports) and is based on surmises and assumptions.
Moreover, recommendations given therein, about reduction in customs tariffs and expanding domain of Ministry of Commerce by bringing custom tariff under MoC, are in conflict (legally and structurally) with international best practices. And tariff policy is actually the customs tariff policy which is devised under the banner of fiscal policy by the Ministry of Finance all over the world.
On the question of jurisdiction to handle customs tariff policy, FBR has stated that the policy domain has been separated from the operations in the FBR and a separate Policy Wing has been created. Further, a separate Tax Policy Board, under the Ministry of Finance has been proposed by the Cabinet that would holistically examine and formulate changes in the customs import tariffs in line with the overall policy objectives of the state.
As per the Rules of Business, 1973, Tax Policy which also includes customs tariff policy, is the function/domain of the Revenue Division. FBR is handling customs tariff policy under the FBR Act 2007.
FBR further argued that the proposal received from the Ministry of Commerce regarding tariff and regulatory duties are duly examined in Revenue Division/ FBR, adding that it was often observed that these are not aligned to government's growth objectives.
In a study carried out by the World Bank, the proposal has been termed as "only mildly trade enhancing" with "estimated GDP gains extremely modest at $ 0.5 billion by 2023. Its possible effect on trade deficit has not been specifically estimated."
An insider told this scribe that the Cabinet is expected to approve the National Tariff Policy in principle only and will direct both Commerce Division and FBR to again sit together and evolve a consensus on tariff rationalization before the announcement of Federal Budget 2020-21.
Copyright Business Recorder, 2019
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