An analysis of the Federal Board of Revenue on the Free Trade Agreement (FTA) between Pakistan and China has not discussed major concern of under-invoicing and possible misuse of FTA by unscrupulous importers. The FBR on Wednesday released the quarterly review with a detailed analysis on Pak-China FTA.
When contacted, a tax expert said that the paper/report has failed to highlight major issue of under-invoicing or misdeclaration of imported consignment from China, where inadmissible exemption of duties and taxes were claimed in few cases under the FTA.
In the past, the Model Customs Collectorate (MCC) of Pakistan Customs Computerised System (PaCCs), Karachi had issued a standing order to specify procedure for clearance of imported consignments under the Pak-China FTA. The steps were taken to check misuse of FTA by the unscrupulous elements. The collectorate has placed necessary checks and verifications from China for claiming tariff concessions under the FTA.
Primarily, there was a need of verification of the Certificate of Origin for China-Pakistan FTA. The verification of authorised signatures from the Chinese government is necessary to check the authenticity of certificates being submitted under the FTA. Such steps were taken in the past to check misuse of the FTA, expert added.
According to the FBR analysis on Pak-China FTA, the FTA between Pakistan and China has helped in increasing trade volume between two countries. The volume of free trade which was only 12 percent in 2004-05 gas gradually reached to 31 percent in 2008-09. Consequently the dutiable imports have declined during the same period.
The increasing volume of free trade is the natural outcome of FTA and it should not be the matter to be worried, as duty free applies only to customs and not other taxes and secondly the overall higher growth in imports would offset the customs revenue loss and the same has been proved from the import data of last few years, which is being discussed in detail in the following section.
Similarly, there are some areas where trade had not existed before FTA, however after the enforcement of FTA the exports has been started to China. If this trend continues hopefully FTA shall produce the desired outcome in the shape of increased demand of Pakistani products in China.
The trade creation and diversion is the natural and desired outcome of the FTAs. In case of Pak-China FTA a mixed response has been witnessed in respect of trade creation and diversion. The overall trade volume has been enhanced significantly. It has been noted that during last four years the share of 17 commodities (80 percent of total exports) has declined by around 5 percent in case of Rest of World (RoW), whereas in case of China this share has gone up from 15 percent to 39 percent, or 23 percent higher (Table 6). A 23 percent increase in share of exports to China indicates that roughly there is a 5 percent trade diversion (from RoW to China) and 18 percent trade creation. The chapters 26, 16, 72, 74 are the major areas where trade has been created and diverted from RoW to China.
Regarding imports, China is the second largest trade partner of Pakistan. During last four years 151 percent jump (ie Rs 116 billion to Rs 295 billion) has been witnessed in imports from China. The share in total imports has risen from 9.7 percent in 2004-05 to 11.7 percent in 2007-08.
The loss or gain of revenue depends on the factors such as level of reduction in rates, number of items and trade volume of imported items. The nominal loss in revenue, if any, is not the real loss as normally it is compensated by expansion in local economic activities. Particularly, trade creation generates the demand of local goods in partner country, which leads to increase in employment; demand for raw materials, thus benefiting downstream and upstream local industries and creating the opportunities of more domestic tax revenues.
Under FTA, normally the custom duty rates are reduced and other taxes like sales tax, WHT, excise duties remain intact. Same arrangement has been made in respect of Pak-China FTA. With the passage of time over the period of last five years the volume of imports from China have increased significantly ie from Rs 74 billion in 2003-04 to Rs 292 billion in 2007-08, reflecting a growth of 294 percent. The analysis of tax revenue has been categorised into two parts; the period under Early Harvest Program (05-06 and 06-07) and enforcement of FTA (1st July 2007 to onwards).
One of the major challenges is the lower growth in exports to China as compared to imports and deteriorating terms of trade and trade balance during last few years. The possible reasons could be the lower potential of our export oriented sectors, low quality (not meeting the international standards) and high cost of production. Pakistan economy largely depends on exports and particularly textile related exports, which is more than 60 percent of total exports.
The Pak-China FTA is a good opportunity for Pakistani exporters. It is a fact that competition for exports is very tough in global market and Pakistani exporters face difficulties in finding sustainable markets particularly in Europe. Moreover, it is costly to trade with countries located faraway. In this scenario Pakistani export oriented sectors and specifically textile sector need to concentrate China as the potential future market for textile related finished products, for import of cheap machinery and other raw materials.