ISLAMABAD: The government has approved partial proposals of the Tariff Policy Board (TPB) suggesting rationalisation of duty on three sectors in upcoming budget 2022-23, while dropping two major proposals for further reduction and abolition of additional customs duty (ACD) on raw materials of the export sector.

The TPB, led by Minister for Commerce Naveed Qamar, is the recommending body to make changes in tariffs to the Ministry of Finance. The decision will be announced in the budget 2022-23 as part of the package initiated two years ago to remove all duties on raw materials, semi-finished products used in exports.

Well-placed sources told Dawn that the finance ministry has agreed to rationalise duties on the value chain of the packaging industry, leather dyes and textile dyes. The TPB has already conducted studies on these three sectors.

The TPB also proposed rationalisation of duty on 30-35 tariff lines of individual industries, which was agreed to be considered in the budget, the sources said.

Sources say govt ignoring Tariff Policy Board in budget-making process

One of the major studies of TPB on the iron and steel sectors suggested drastic changes in tariff rates. However, this proposal was dropped by the finance ministry for consideration in the budget. Similarly, the finance ministry also dropped the proposal of further reducing or abolishing ACD on raw materials in the budget.

Two years ago the government has initiated a tariff rationalisation process which will be completed by FY24 to completely abolish duty and taxes on raw materials, semi-finished products to promote exports from the country.

In the budget 2021-22, the government exempted duty on 600 tariff lines, besides a reduction in duty on several other tariff lines, while in 2020-21 the duty was reduced on 2,000 tariff lines.

According to state-run news service APP, Prime Minister Shahbaz Sharif met a delegation from the American Business Council to discuss budget proposals. The premier directed the relevant authorities to abolish all taxes on raw materials used in the export industry and form task forces to attract investment in multiple sectors.

According to sources, TPB, which is the relevant body, was completely sidelined in the whole exercise of budget making. “We don’t know who is making decisions regarding tariffs,” a member of the TPB told Dawn, requesting anonymity.

The TPB is kept in complete darkness in the whole exercise of imposing bans on items and now reductions in duty on items to be announced in the budget. The finance ministry has no mandate to make changes to the tariffs, the member further said.

The finance ministry is also working on a proposal to achieve revenue targets of Rs7, 225 billion in 2022-23 by enhancing import tariffs through upward adjustment in import duty slabs. However, this proposal was strongly objected to by the tariff policy centre (TPC).

The TPC sent a two-pager letter to commerce and industry ministers to appraise them of the harsh consequences of reversing the customs tariff back to the 70’s and 80’s which would certainly have repercussions for trade and industrialisation. The additional burden at the import stage would further worsen the parity between revenue generation from domestic and import taxes.

In the current year, 52pc of total tax revenue has come from import stage taxes, which will increase if this measure is adopted.

Regulatory Duty was introduced in 2007 on 317 tariff lines as a temporary measure and has gone up to around 2000 tariff lines at the rate of 2–90pc. Similarly, additional customs duty introduced in 2013 at the rate of 1pc has gone up to 2-4-6-7pc covering 5177 tariff lines. Pakistan’s average tariff rates are much higher not only globally but regionally also.

Increasing duties to raise revenue and suppress imports has never given results in the long run. Increasing tax rates as a “Temporary Measure” is also a misnomer.

Major increase in the import bill during 2021-22 is due to increase in energy prices. Energy imports is 31pc of the total import bill.

As most of the consumer goods are already banned, energy prices are not expected to fall and food prices are expected to rise, any increase in tariff would only hit import of raw material & intermediates (33pc of total import bill) and capital goods (13.2pc).

Rising prices of energy and devaluation of rupees are likely to compress imports. Any further compression through higher tariffs would strangulate industrial growth, flare up inflation further and hurt exports.

Published in Dawn, June 9th, 2022