Govt’s Tax Policies Are Stifling Pakistan’s Growth

The National Tariff Policy (2019-24) was a step in the right direction but remained ineffective in removing rigidities and simplifying the tariff structure, according to the Policy Research Institute of Market Economy (PRIME). PRIME released its latest report titled, “An Empirical Critique of National Tariff Policy 2019-24”, which noted that a complex tariff structure causes delays and inefficiencies in the promotion of manufacturing exports from Pakistan. NTP 2019-24 became dormant soon after its enactment in 2019 as the Federal Board of Revenue (FBR) continued to use imports as a revenue measure. Import duties contribute 24 percent to indirect taxes, and 75 percent of customs duties are being collected from 15 product groups. FBR, the Ministry of Commerce, and regulatory bodies are trying to manage imports with cumbersome and vague procedures of imposing and availing exemptions given in the fifth schedule. The report noted that NTP 2019-24 outlined a complex formation of the tariff board. The Tariff Policy Board, due to its structure and voting pattern, remained ineffective and mostly inconclusive in making timely decisions. Pakistan’s trade policy framework is complex, with multiple nontariff barriers (NTBs) and tariffs affecting international trade. The government aims to gradually remove protectionist policies to address market failures. However, high tariff rates, complexity, and corruption lead to under-invoicing and smuggling, which are some of the challenges the government tried to correct through the National Tariff Policy 2019-24. National Tariff policy used cascading as a principal objective to protect the local industry. After analysis, it appears that the policy to protect local industry is curbing trade in Pakistan and promoting a rent-seeking culture. The cascading principle has a selectivity bias as small and medium industries are unable to avail duty exemptions. For example, iron, steel, and paper commercial importers are benefiting from duty exemptions. This report indicates that the SRO culture and exemptions given in the fifth schedule have increased the complexity of the tariff structure in Pakistan. Multiple rates and non-tariff barriers (NTBs) affect international trade in Pakistan. Custom duty continues to be the major revenue spinner. Sales tax on imports contributes significantly to the total sales taxes in Pakistan, with a 61% share in fiscal year 2022-23. The report also highlights that there is a need to increase the import base as 43 percent of the imports are in the exempted products list. It is further noted that around 71 percent of customs duties were collected from 10 product groups. In the year 2022-23, the base of dutiable imports further shrunk to 18 percent (FBR yearbook 2022-23). The report analyses the tariff structure and its impact on trade contraction in Pakistan. The National Tariff Policy 2019-24 prescribed departing from using tariffs as a revenue collection measure, but that specific policy proposal was not put into practical use. As such, the impact of its lopsided tariff structure—the number of tiers and slabs—proved to impede industrial growth while causing delays and inefficiencies in the promotion of manufacturing exports from Pakistan. Authored by Dr Nadia Tahir, a PRIME research fellow, and Usama Abdul Rauf, this report offers an examination of the soon-to-be-lapsed policy. For Pakistan’s trade policy to assume a robust framework, the report recommends the simplification and gradual reduction of tariffs.  Furthermore, a review every 10 years of the tariff policy is recommended for the tariff policy to remain relevant and effective in achieving its objectives. During the last 5 years, distortions in tariff policy have increased significantly. It has restricted trade and adversely affected growth in Pakistan. Using petroleum products, chemicals and minerals for revenue collection is a hindrance in becoming a part of global value chains. Frequent changes in tariff structure and rates are another area that needs the attention of our policymakers. “Empirical evidence proves that a uniform tariff rate is the most efficient way to handle trade policy…Optimizing revenue would be easier at a uniform rate rather than calculating custom duties at different rates. One can calculate the nominal protection rate, but it would be challenging to calculate trade intensity and effective tariff rates,” concludes the report. Dr Ali Salman, Executive Director at PRIME, speaking at the occasion said that we should stop using custom tariff and import taxation as a revenue tool, and should use this as a tool of industrial policy. As was observed in the report, Pakistan’s import structure shows that commodities with low tariff rates have higher trade volumes. The government’s imposition of high tariff rates and Non-Tariff Measures (NTMs) on certain products would not completely discourage their consumption. Instead, a preference for under-voicing and smuggling over regular channels will materialize. Parliamentary Secretary, Dr Zulfiqar Ali Bhatti, spoke about how aid categorically impedes economic growth, and recommended trade volume as an indicator of prosperity. Pakistan has to sell to the world, for the country to reap the benefits of international trade. In this respect, the cascading principle outlined in the National Tariff Policy 2019-24 insulates the local industry from global market opportunities. Hence, a considerable part of the economy is riding on the next five-year national tariff policy.