The 2017-18 federal budget unveiled a two-pronged strategy to promote investment and industrialisation in the country: by reducing the cost of production and protecting domestic goods from foreign competition.
The objective is to achieve an industry-led robust growth.
Contrary to the current practice in the tax authority, tax experts argue that determining the optimal tariff implies switching the existing tariff structure from nominal to effective protection rates (EPR) for the domestic industry. The EPR calculation requires a detailed cost data analysis of every product, covering all aspects of manufacturing, from investments to the cost of production and cost of sales.
In successful countries, tax policies are formulated to spur investment, production, trade and economic growth. They are not focused merely on revenue collection.
The focus is now on industrial development
The effective rate of protection can be calculated only after doing a comparison with the landed cost of imported goods. The element of duties and tax in investments, raw materials and the landed cost of raw materials need to be compared. This exercise will have to be done individually for all locally manufactured products.
The task of determining the EPR was assigned to the National Tariff Commission (NTC) recently.
The focus now is on reducing import duties and taxes on raw materials and rationalisation of tariffs and taxes on finished products. The government’s economic planners hope the two measures would spur industrial development.
The rate of regulatory duties on food items, and traditional sectors like leather, sports, etc has been increased to control the import of these products.
Federal Board of Revenue Chairman Dr Muhammad Irshad told Dawn that the FBR has initiated a historic exercise to eliminate discriminatory concessions, and exemptions amounting to over Rs300bn in the last three years. He said measures were taken to ease the cost of doing business, providing incentives for growth and employment generation.
Since the economy has started growing after achieving stability and the climate for new investment is rapidly improving, it is the right time to accelerate the pace of growth in the coming years by continuing the tariff reform process, says the FBR chief.
To mention a few examples: aluminium ingots are used as input in the auto industry and other engineering goods. The customs duty was cut to 5pc from 10pc on aluminium waste or scrap.
Contrary to the current practice in the tax authority, tax experts argue that determining the optimal tariff implies switching the existing tariff structure from nominal to effective protection rates for the domestic industry
There are a sizable number of tanneries in the country engaged in the manufacturing and export of quality finished leather and leather products. To benefit the leather sector, the government has exempted the 3pc duty on import of raw skins and hides.
Another raw material, stamping foil, has specific industrial use in footwear, artificial leather and printing industries etc. The 16pc customs duty on stamping foil was withdrawn to provide relief to industries. To boost the local wood based industry, the customs duty on sheets for veneering was reduced to 11pc from 16pc.
Non-woven fabric is used in manufacturing of bandages, medical gown etc. The duty on this raw material was reduced to 5pc from 16pc to facilitate the pharmaceutical industry. On welding electrodes, which are extensively used in different sectors including iron and steel and construction was reduced to 20pc from 25pc.
Several raw materials which are manufactured locally were identified in the budget. These raw material industries were given protection by imposing additional regulatory duty on their imports. To incentivise the local production of synthetic filament yarn, the FBR imposed regulatory duty of 5pc on it. Similarly, to replace import of aluminium beverage cans with local production, the regulatory duty was raised to 20pc from 11pc on its import.
On the raw material of metallised yarn, the customs duty was reduced to 11pc from 20pc while a regulatory duty of 5pc was imposed on its finished product to provide protection to local industries. To incentivise local manufacturing of PVC resin, a 2pc regulatory duty was imposed. This will enable the local industry to investment more in this important material.
To promote the domestic industry of float glass and mirror, a 5pc regulatory duty was imposed and 10pc on sacks and bags. Moreover, duty was reduced on raw materials not locally produced for manufacturers of baby diapers.
Protection through tariff was also extended to sectors like electro-thermic domestic appliances like coffee, tea maker, dryers, iron, grinders, mixers, juice extractors, insect killer with electric apparatus containing liquid bottle.
The FBR has also rationalised tariff to boost local production especially in the poultry sector. In the agriculture sector, all milk products were subjected to additional regulatory duties. Similarly, regulatory duties were raised on import of fruits and vegetables of various types in fresh and processed forms.
Other sectors where regulatory duties were imposed to promote domestic manufacturing were coffee, soya sauce, tomato ketchup, mustard flour, soups and broths, ice cream and other edible ice, concentrates for aerated beverage in all forms, syrups and squashes, sweet meats and mineral and aerated water.
To discourage import and provide protection to local industries duty were raised on perfumes, lip make up preparations, eye makeup preparations, nail polish, face powder, talcum powder, face and skin creams, tonics and skin food, shampoos, cream for hair, hair lacquers, dyes for hair, tooth paste, and shaving cream.
Adequate protection was also extended to sectors like product of leather, sportswear, jacket, and footwear, various kinds of ceramics, dinner sets, dishes, plates, tea cups, and ceramic tableware.
In electronics, the duty was raised on ceiling fan, pedestal fan, table fan, exhaust fan, and air conditioners, several electronic products and sports products to incentivise its local production.
Published in Dawn, The Business and Finance Weekly, June 5th, 2017