MUSHTAQ GHUMMAN

ISLAMABAD: Ministry of Commerce (MoC) has reportedly proposed constitution of an inter-ministerial committee to rationalize tariffs and formulate a simplified duty exemption scheme for export-oriented sectors, well informed sources told Business Recorder.

Commerce Ministry’s proposals are for the Monetary and Fiscal Policy Board headed by the Finance Minister, Senator Ishaq Dar.

The Ministry maintains that tariff regime simplification can start with the gradual phasing out of the distortive regulatory duties and thereafter move towards rationalizing the tariffs faced by export-oriented industries (involving a reduction in dispersion in the average nominal tariff rates) with a medium-term shift towards the adoption of a uniform tariff regime. A review and approval of the new tariff structure should then rest with the above-mentioned high-powered Committee.

The sources said ambitious approaches in the past had hindered the understanding and potential of implementing a simpler tariff regime. However, the new recommendations have a greater likelihood of success due to a gradual approach towards changes in tariff structure, being proposed through a focused study whose scope will include a phased plan to ensure revenue neutrality.

“The purpose of tariff rationalization exercise done by FBR in recent years was to meet IMF conditions of reducing tariff slabs while maintaining revenue levels. As the upper slabs were moved from high to low (from 25 to 20 percent), the lower slabs were moved up (from 0 to 2 percent). In many cases this made machinery and inputs more expensive while reducing effective protection rates for value-added goods, thus disturbing the value chain,” the sources added.

Pakistan has lost on average 1.45% yearly in global exports market share since 2005 as it registered a low USD 20.1 billion in FY16. Export performance has also been subpar when compared regionally and internationally, both as a percentage of GDP and in absolute terms. Pakistan’s trade-to-GDP ratio was close to Bangladesh’s in 2000. Over the past decade, Bangladesh’s trade-to-GDP ratio has increased by approximately 50% to 42.1%, while Pakistan’s ratio has remained unchanged at 28.1%. Pakistan’s exports of goods and services rose from $8.6 billion to $19.9 billion (a mere 2.3 times) in 23 years from 1991 to 2014 while those of Bangladesh rose 22 times from just $1.1 billion to 24.3 billion, of Vietnam 33 times from $3.3 billion to 90.5 billion, of India by 14.5 times and of China by more than 25 times, over the same period.

The sources said country’s ability to participate in global value chains and conduct regional trade has weakened overtime. This among other factors is attributed to: (i) fiscal policies that rely heavily on devices like high import duties and regulatory duties to augment tax revenues and ease the burden on the external account, resulting in the reversal of the trade liberalization reforms undertaken during the period 1996-2003, and (ii) the relatively high levels of protection to some sub-sectors of industry such as automobile and leather. The lack of mutual understanding and missing coordination between MoC and FBR has resulted in different, at times contradictory, economic priorities in these institutions.

According to sources, the regulatory regime faced by the private sector has constrained additions to installed capacity of exporting entities. This also hindered startup investment in export-oriented industries. Pakistan ranks 138 out of 189 economies in the Doing Business Report 2016, having fallen 62 ranks since 2008. Similarly, Pakistan also ranks 126 out of 148 economies in the World Economic Forum’s Global Competitiveness Index 2015-16, a major fall from being 91 out of the 134 economies covered in 2006. Pakistan’s worsening performance on indices measuring the overall investment climate in the country is reflective of the significant costs and perceived risks to investing and operating in Pakistan. Total investment as a percentage of gross domestic product (GDP) in Pakistan has declined from approximately 19% in 2006-07 to around 15% percent in 2014-15; the annual average for South Asia as a region is almost 33 percent. Private sector investment to GDP has almost halved over the last decade i.e. from a high of approximately 16% in 2006 to less than 10% in 2015. The overall impact results in a lack of surplus production for exports which is reflected in the negative quantum impact.

In paying taxes and cross border trade Pakistan is ranked at 171 and 169, respectively. According to World Economic Forum, Pakistan ranks 136 out of 142 countries in terms of trade tariffs. Pakistan’s tax rates are amongst the highest and most skewed in the world. According to a World Bank report, Pakistan earns 40% of its tax revenue by taxing international trade, while most of its notable competitors accumulate less than 5% under this head. Our average corporate income tax rate is 31% compared to the global average of 24%. The standard rate of sales tax is 17% compared to 12% in neighboring countries, including India and Sri Lanka. Other countries have about 1 or 2 rates for sales tax while Pakistan has about six.

Pakistan is currently the world’s seventh most protected economy as measured by the Overall Trade Restrictiveness Index (OTRI) .Pakistan’s tariffs are almost twice as high as the world average and three times more than those in South East Asia. Over the last decade, frequency of tax payments for limited liability companies in Pakistan has remained at 47, significantly higher than the South Asian average of 31 and the OECD average of 11 payments per year. Preparing, filing and paying for these taxes consume 594 hours per year, which has risen by 34 hours over the last decade. In contrast, it takes half the time to file and pay taxes in the South Asian countries.

Pakistan’s export oriented sectors have not been able to integrate with global value chains to their potential. Two major issues continue to restrict the country’s ability to participate in global value chains. These are a) tax regime that relies heavily on devices like high import duties and regulatory duties to augment tax revenues, resulting in the reversal of the trade liberalization reforms undertaken during the period 1996-2003; b) the relatively high levels of protection to some sub-sectors. Provinces have increased indirect taxes on exporting entities and also imposed transport and transit levies, and infrastructure cess.

“We have recommended that Monetary and Fiscal Policy Board should constitute a joint committee on “exports competitiveness” comprising of additional secretaries from Ministries of Commerce and Finance, Federal Board of Revenue and Board of investment for the following tasks: (i) prepare a roadmap for tariff rationalization and (ii) develop a simplified duty exemption scheme for export oriented sectors.

Commerce Ministry has recommended that a tariff rationalization roadmap may be developed. This exercise should be revenue-neutral and accompanied by compensatory revenue sources, by looking at international best practices.

In order to increase competitiveness of Pakistan’s exports, the objective of the tariff rationalization exercise should be to develop a tariff structure to encourage value addition in Pakistan’s production base. It should be based on the principles of cascading and tariff escalation along the stages of value addition. The tariff regime should be simple and transparent structure with low average tariffs and minimum dispersion. The impact of value chain distorting regulatory duties and SROs should also be addressed.

It has also been proposed that the methodology of the analysis may be based on the following: (i) estimation of revenue loss, consumer welfare gains, displacement of local producers and trade diversion and creation effects. In addition to economic analysis, the findings may be verified with inclusive focus group discussions with the industry and relevant government institutions (NTC, FBR, Ministry of Industries and Production etc.); (ii) identify biases in the current tariff regime that increase tariff protection for inputs and thus reduce effective protection rates for the value added industry; (iii) study the distortionary impact of SROs (fifth schedule) and regulatory duties on value chains and ;(iv) the study may analyze the impact on economic growth of prolonged protection offered to some sectors and suggest withdrawal of tariff protection from inefficient, non-viable or government dependent industry.

Objectives of a simplified revenue exemption scheme, sources said, would be to assess the effectiveness of the tax rebates/refunds and zero rating schemes and: (i) suggest how the schemes be improved and what are other ways of promoting exports in the light of experiences of successful exporting countries and international best practices. Lessons from successful competitors (e.g. Bangladesh, Vietnam, Indonesia, India etc.) may be studied and ;(ii) propose and design a simplified revenue exemption scheme along the lines of best practices of the bonded warehouse scheme for the garments sector in Bangladesh.