SOHAIL SARFRAZ

ISLAMABAD: The World Trade Organization (WTO) has said the prevalence of Statutory Regulatory Orders (SROs) - a discretionary measure for providing tax and tariff exemption to vested interests - significantly drains out fiscal revenue collection of the Federal Board of Revenue (FBR).

This has been mentioned in the latest report, prepared for the fourth Trade Policy Review of Pakistan-2015 by the WTO Secretariat.

It said that, although the FBR website indicates that a number of SROs have been rescinded in 2014; the system of SROs continues to hamper transparency.

It said the tariff rates are amended annually at budget time and approved by the Parliament in the Finance Act. The FBR determines annual tariff rates in collaboration with key ministries, including finance; commerce; and industries & production. It also receives tariff recommendations from the National Tariff Commission (NTC), in particular reference to protection of indigenous industry, improving competitiveness and promoting exports from Pakistan.

It said the government has general authority to apply tariff exemptions/concessions, and to add or modify import rules, the latter being issued by the FBR as SROs, which are approved by the Economic Coordination Committee of the Cabinet. Exemptions and partial exemptions provided for industries under the SRO regime are a central source of deviation from the MFN rates. Transparency, and therefore analysis, of the level and structure of Pakistan's tariffs has made greatly complicated the large number of exemptions and partial exemptions which are announced separately through SROs and do not affect the customs duty rate shown in the customs duty column of the tariff schedule. Other SROs further specify whether specific products are exempted from sales and other domestic taxes, as well as rules and ordinances affecting imports. Although available on the FBR website, separate SROs make it difficult to discern the applicable taxes and other measures imposed on individual tariff items which may be covered under multiple SROs. Often, SROs provide the exemptions for inputs for certain industrial sectors. By confining regulations to select sectors these exemptions operate as a de facto licensing scheme. The 2014-15 budget exercise included the withdrawal of three major SROs, ie, 565(I) 2006, 575(I)/2006 and, 567(I) 2006 as well as the elimination of concessions available to 89 industrial sectors, it added.

It said that since the last review, the most prominent exemptions applicable to the industrial sector were provided in three SROs accounting for 23 percent of Pakistan's imports in 2009-10.On average, companies or industries under these three SRO provisions receive concessions up to around 11 percentage points from the statutory rates, applied non-uniformly across the industries. In addition, a comprehensive scheme of exemptions in the automotive sector, which discriminates by type of market (Original Equipment Manufacturer (OEM) versus after-sales parts), is implemented under SRO 656(I)/2006, auto-vendors under SRO 655(I)/2006 and SRO 693(I)/2006. Although the FBR website indicates that a number of SRO have been rescinded in 2014, the system of SROs continues to hamper transparency.

It remains difficult to provide a clear picture of which concessions/exemptions continue to operate and to assess their incidence. The extent to which new exemptions and concessions extend, replace or duplicate previous ones are often unclear as is the number of amendments that have been made to some of these SROs. Their use makes the tariff regime complex and less transparent. By altering the structure of tariff incentives unpredictably, with uncertain effects on resource allocation, these concessions and exemptions may counteract economic efficiency by raising tariff and increasing effective rates of protection.

3.28. The cost of exemptions and concessions as a result of import-related SROs amounted to Rs 137 billion during the financial year 2013-14. It is worth noting that Pakistan is committed to eliminate most tax or customs tariff exemptions or concessions granted through SROs and to approve legislation by end-December 2015 to permanently prohibit the practice as part of the request for financial assistance from the IMF.

The FBR maintains lists of active SROs for both imports and exports. In the case of imports some 92 SROs remain active. It has been estimated that out of this overall number, some 38 active trade-related concessionary SROs, introduced between 1991 and 2010 hamper trade, increase the cost of doing business and breed malpractice. The regime is complex, discriminatory and lacks transparency.