Prime Minister Imran Khan remarked during the cabinet meeting upon approval of the first-ever National Tariff Policy (NTP) formulated by the Commerce Division, subsequent to extensive consultations with stakeholders, that tariffs traditionally employed as revenue generation measures would henceforth reflect the requirements of industrial development and export growth. There is no doubt that this is a paradigm shift and must be fully supported. The devil, however, is in the detail and the policy naturally does not focus on precisely which imports would tariffs be altered to promote industrial production and exports. The NTP states that amongst others the decision would be based on the principle of “providing time bound strategic protection to the domestic industry during the infancy phase” – a principle that one hopes would not be misused by extremely influential cartels, especially during times of global recession when our consumer exports are negatively hit.
What may complicate matters in implementing this landmark decision is that the country is currently on a 39-month International Monetary Fund (IMF) programme which requires the Federal Board of Revenue (FBR) to generate 5.5 trillion rupees in the current year, a target which is considered unrealistic by independent economists reflected by the 166 billion rupee shortfall in revenue collection during the first quarter of the fiscal year, with the bulk of the shortfall attributed to lower imports due to an undervalued rupee. This may have prompted the economic team leader Hafeez Sheikh, Adviser to the Prime Minister on Finance, to rely more heavily on privatisation proceeds, budgeted at a mere 150 billion rupees, to meet the revenue requirements of the government. Sheikh has already indicated that the government intends to fast track the sell-off of two RLNG power plants, estimated proceeds of 300 billion rupees, as well as other entities in the current year. In this context, it is relevant to note that the IMF first review has been successfully completed; however, the revenue shortfall for the second quarter with the Fund review due end December, may be more challenging and therefore the FBR may require deferment of any variation on the import tariffs which are being employed as revenue generation measures.
Developed countries rely heavily on income taxes as a source of revenue rather than on import tariffs, a thrust supported by the World Trade Organisation. However, the Trump administration, focused on fair rather than free trade, has begun to use tariffs as a weapon designed to balance trade with its major trading partners, including the European Union and China. However, developing countries like Pakistan do not have the clout to use tariffs as weapons to enhance exports; additionally, with an appallingly low number of income taxpayers, whose incidence on the rich is more than on the poor, successive Pakistani administrations have increasingly relied on indirect taxes including import tariffs and sales tax for revenue. The additional advantage of this reliance for the Federal Board of Revenue (FBR) has been that these taxes were relatively easier to collect. policy
Be that as it may, the PTI administration has begun to make some changes in the tax structure including making it mandatory to file returns, though sadly the majority of the new filers are not eligible to pay taxes, for example, widows and retirees; the condition to use CNIC for all transactions above 50,000 rupees has also not yet been implemented and has been deferred till 1 February, 2020.
Allowing the Commerce Division to determine tariffs has been long overdue as it has been one of the factors impeding industrial output and exports however, unfortunately, this is not the only one and we would urge the Prime Minister to revisit other policies impeding exports. Additionally, he must direct the Commerce Division to focus on raising exports and not simply relying on exporting surplus output as at present.
(This news/article originally appeared in Business Recorder on November 22nd, 2019)