The Ministry of Industries and Production has strongly opposed the proposal of bringing all customs tariff down to a maximum ad valorem rate of 10 percent, as a general uniform rate of zero percent customs tariff to 10 percent would increase trade deficit, erode exchange reserves, severely hurt local manufacturing, and bring an overall economic misery.
Sources told Business Recorder here on Tuesday that the Engineering Development Board of the Ministry of Industries and Production has finalised its detailed comments on Planning Commission's Report on 'Pakistan's Trade Policies-Future Directions'.
The Ministry of Industries opined that the recommendations of the Planning Commission are a paradigm shift that would not only change the government's conscious policy of providing even playing field to the local industry vis-à-vis import substitutes and promoting indigenisation, but would also have far reaching implications on the local industry.
On the recommendation of bringing all tariffs down to a maximum ad valorem rate of 10 percent, the Ministry of Industries commented that during 1996-97 'Trade Liberalisation Program' was initiated and the tariffs were steadily reduced. The 'Tops Down' process simplified the tariff structure, reducing the number of tariff slabs to four with minimum rate of 5 percent and maximum of 25 percent from 14 slabs ranging from 0 percent to 65 percent during 1996-97. The tariff structure remained the same up to 2007-08 when the tariff rates on many products were raised to 30 percent and 35 percent, and a few were brought down to 0 percent. This was done in close consultations with the stakeholders and has been in practice since then without any distorting effect.
It is also important to highlight that plant, machinery & equipment used for setting up an industry are already subjected to lower rate of customs duty ie 5 percent. Similarly, industrial inputs though attract higher tariff rates under the First Schedule to the Customs Act, 1969, are subjected to lower rates under various regulatory notifications. Likewise, essential commodities and pharmaceutical raw materials attract lower tariffs.
Under the existing scheme, majority of imports are subjected to lower rates in the range of 0-25 percent. Hence, lowering tariff rates, besides minimising tax revenues, would hurt local industry, and thereby double jeopardy for the exchequer, which would lose substantial chunk of domestic taxes. It should also be taken into consideration that developed economies consider 15 percent duty rate as "Tariff Peak". Zero-percent tariff, wherever applied, is either on basic raw materials or other inputs not available in their country. Finished products on which no duty is levied are those in which they have a strong technological advantage, sources said.
The Ministry of Industries further said that Pakistan also need to wait for the outcome of NAMA and other FTA negotiations so that it may have an industrial base to offer concessions In lieu of concessions, it needs market access and export growth. Protection can be justified in industries that have potential to generate benefits for the rest of an economy but need time to acquire production efficiency.
It is also emphasised that Pakistan is not a 'least developed country' with zero industrialisation. A general uniform rate of 0 to 10 percent would increase trade deficit, erode exchange reserves, severely hurt local manufacturing, increase unemployment, increase poverty, and bring an overall economic misery.
The MOI&P is, therefore, of the considered opinion that all tariffs above 25 percent should be discussed, individually, on their merit or otherwise. Further, the customs import tariffs cannot be reduced to the extent that future potential of industrial development is compromised. The Ministry of Industries supports liberalisation of trade through gradual reduction of tariffs, which should be carried out in close consultation with all relevant stakeholders in a phased manner and by way of a thorough study of Effective Rate of Tariff Protection (EPR) by the National Tariff Commission.
The MOI&P further stated that the concessionary tariffs are provided for inputs considered necessary for making the industry competitive with imports, and not for commercial trading activity. Concession is provided on inputs which have multiple uses and are specific to priority industry which requires time to acquire production efficiency. Additionally, checks and balances are required to be maintained as Pakistan face challenges in shape of trade deficit, revenue generation, employment creation, developing priority sectors, etc. In this situation, a balance needs to be created through targeted efforts. For such targeted efforts, tariff dispersion through concessionary notifications is an instrument not only used by Pakistan, but also practised in competing economies including India, Malaysia and Thailand through concessions in basic customs duty or other Par-tariffs levied at import stage.
If the concessions provided under the aforesaid notifications are made available to commercial importers, the same are very likely to be misused by the industry operating in the informal sector, without any benefit to the exchequer in terms of domestic taxes, as well as to the legitimate industry; and thereby defeating the very purpose of providing concessions, the MOI&P added.
Sources referring to the MOI&P stated that non-tariff measures are used as a tool by the government to regulate import of certain items, due to obligations under the TRIMS AGREEMENT, to which Pakistan is also a signatory along with many other WTO member countries. These Non-Tariff measures besides regulating imports are an effective tool to counter dumping. Moreover, Non-Tariff measures are taken by many developing economies like Pakistan to provide optimum protection to the nascent local industry.
As regards "Import Licensing", it is clarified that it is in fact a regulatory system in a consultative mode to create a balance between priorities and impediments. Quota allocation of imported inputs under FBR notifications SRO 656 (1)/2006 and 655(1)/2006 by EDB, is being done with a view to circumvent possible misuse of concessionary imports. Needless to emphasises, tariff concessions are provided as a conscious policy decision of the government to promote industrialisation, which in turn, maximises domestic revenues, encourages transfer of technology, generates employment, develops priority sectors, etc.
It is pertinent to highlight that, in the formative phase all advanced economies including those of Japan, India, Thailand, Malaysia, Europe, etc resorted to such protections. Pakistan is and must continue to support its local industry. Regulation of imports under concessionary regime in no means can be considered a licensing regime. If the concessions under these notifications are provided without any quantitative restrictions, the same are very likely to be misused by the industry operating in the informal sector, without any benefit to the exchequer, as well as to the legitimate industry, the MOI&P added.
On the proposal of import tariffs that it should be low and uniform, the MOI&P has commented that the customs tariff is based on internationally accepted Harmonised Commodity Coding and Description System. The method adopted in this system is its movement from simple to complex products (ie from natural products to hi-tech products and from raw materials to finished products). This method is not only followed intra chapter, but also within chapters of customs tariff internationally.
A simple cascading of tariff structure providing nominal tariff dispersion based on this method can provide a simplistic solution but would not serve the individual needs of all the manufactured products. The dynamics of every commodity is different. Therefore, reliance on a single rule applied across the board can prove counterproductive.
The customs import tariff also represents all the policies of the government, such as investment policy, power policy, education policy, health policy, tourism policy, textile policy, automotive industry policy, export policy, petroleum policy, energy conservation policy, food security policy, agricultural policy, and a host of other policies. Adjustments in tariff need to be made to allow interventions of the government to achieve specified objectives. Such adjustments are also bound to create distortions in tariff. For instance, in accordance with the Education Policy of the Government, books and other printed materials are zero rated, whereas paper is chargeable to customs duty @ 25 percent. Such distortions also need to be addressed while reviewing tariff, besides aforesaid government policies need to be addressed through tariff, as well as, non-tariff measures.
The tariff is also subjected to bindings agreed by the Government of Pakistan in WTO, besides those agreed bilaterally with various countries. Due care needs to be taken of the already agreed tariff bindings, the MOI&P stated. On the recommendation of abolishing present regulatory duties, the MOI&P observed that the regulatory duties are levied not to generate revenues but to regulate consumption/imports of certain items. At present, only a few luxury items (not more than 5 percent of total tariff lines) are subjected to regulatory duty, while regulatory duty on most of the items has already been withdrawn in the budget for 2011-12.
Responding to a recommendation on auto sector, the MOI&P commented that tariffs play an important role in the development of auto sector and all developing or newly developed countries use tariff protection as an effective tool for the growth of auto industry. India has a uniform rate of customs duty @ 100 percent irrespective of engine capacity. Additionally, there is levy of central excise duty @ 24 percent on cars with a capacity not exceeding 1500 cc, while CED rate for cars exceeding engine capacity of 1500 cc is 24 percent + Rs 20,000 per unit. Thailand has a duty of 80 percent plus excise duty.
New Zealand and Australia followed the World Bank sponsored program, under which customs duties on import of cars were gradually reduced from 55 percent in 1984 to 15 percent in 2001 ie spread over a period of 17 years. This resulted in closure of manufacturing facilities of Toyota, Ford, Mazda, Mitsubishi, Honda and Nissan in New Zealand in 1998. In Australia, the presence is of assembly operations based on kits imported from Japan and Asean region to cut freight cost on transport of CBU.
The Auto Industry Development Program (AIDP), duly approved by the ECC, laid down a "Five Year Tariff Program" for the Auto Sector so as to provide a predictable and stable tariff environment and consistency in the policies. The tariff was to be reduced by 5 percent on all cars above 1000 cc, starting from 2009-10 in addition to achieving indigenisation of engine and transmission parts. This was deferred by the government for one year. However, this was not implemented by FBR in 2010-11 although the MOI&P had recommended its implementation; and again through a summary for ECC recommended reduction in duties by 10 percent which was deferred by the ECC.
The Ministry of Industries supports tariff reduction on CBU (Completely Built-up Unit) by 10 percent across the board in the first phase, followed by gradual reduction up to a maximum of 20 percent across the board reduction in the existing tariff for cars of different capacities. The Ministry of Industries also supports upward revision of tariff on the parts and components that were required to be indigenised by the year 2010-11, in accordance with the Auto Industry Development Program (AIDP).
On the recommendation of an immediate cuts in motorcycle tariffs to 15 percent or 20 percent, to be followed by further cuts to a maximum of 10 percent, the MOI&P stated that the motorcycle industry of the country is performing extremely well, as the production has gone up, while the prices of locally made motorcycles have substantially reduced. Moreover, the local industry has been able to find export markets. Hence, further reduction in tariff rates, as suggested by the Planning Commission would seize this opportunity from our local industry, besides the chance of earning valuable foreign exchange, which the country needs more than ever.
Moreover, there is no issue of demand, supply and prices and the industry is on the growth path. India, which manufactures about 8.5 million motorcycles, has a duty of 100 percent plus 16 percent CED. China, the largest producer, has a duty of 45 percent.
In view of above, the Ministry of Industries does not support reduction in tariff on motorcycles in CBU condition, so as to ensure growth of local industry, besides availability of motorcycles at affordable prices to the lower income strata of the society.
On the recommendation to review present bans and restrictions on the import of second-hand products, the MOI&P commented that it does not support the proposal, as this would make Pakistan a dumping ground for all products which have outlived their utility or have been phased out technologically. One of the major reasons for economic inefficiency (especially in energy consumption) is import of second-hand goods and productive assets. This will only increase energy deficiency in Pakistan.
The anti-dumping laws are in accordance with WTO Final Act and guidelines, while consumer protection is a separate subject; and must not be confused with trade remedial laws, sources said. If the concession is provided without any quantitative restrictions and to commercial traders, it will be misused by the industry in the informal sector, without any benefit to the exchequer, as well as to the legitimate industry. The Ministry supports gradual reduction of "Import tariffs", which should be carried out in close consultation with all the relevant stakeholders in a phased manner.
With regard to abolishing the regulatory duties (RD), the Ministry opines that a review of levying RD can be discussed on case to case basis. Only a few items are now subjected to RD, while RD on most of the items has already been withdrawn in the budget for 2011-12. With regard to bring down all motorcar tariffs to a maximum of 25 percent, the Ministry of Industries supports tariff reduction on CBU by 10 percent across the board in the first phase, followed by gradual reduction up to a maximum of 20 percent reduction across the board.
The Ministry of Industries also supported upward revision of tariff on the parts & components that were required to be indigenised by 2010-11, in accordance with the Auto Industry Development Program (AIDP). With regard to immediate cuts in motorcycle tariffs to 15 percent or 20 percent, the MOI&P does not support reduction in tariff on motorcycles in CBU condition, so as to ensure growth of local industry, besides availability of motorcycles at affordable prices to the lower income strata of the society, the Ministry of Industries added.