KARACHI: The new tariff policy drafted by the Commerce Division has been finalised after consultations with all stakeholders in government and industry, and is now ready for transmittal to the federal cabinet, Secretary Commerce Mohammad Younus Dagha told Dawn on Tuesday.

The policy, which aims to boost exports by harnessing the potential of small and medium enterprises (SMEs), was drawn up in April and circulated to industry stakeholders in July. It is part of the government’s promises for their first 100 days. It seeks zero duty on imports of all raw materials and machinery for all export-related industries in the first two years of its five-year implementation plan. Currently, only the big exporters who import their raw materials and capital goods under the DTRE scheme enjoy zero rating on these items, Dagha said.

Imports of raw materials and capital goods to be zero-rated for all export-oriented industries

“For the SMEs, these schemes are meaningless,” he said, adding “because they cannot afford to start an import unit alongside their export business and even if they do so, they definitely cannot import inputs in large lots which are the minimum order requirements for suppliers.”

The draft proposes elimination of all “difference in the rates of tariff for the commercial importers and the industrial users of raw materials, intermediate and capital goods” to reduce misuse of such differences as well as to facilitate the SMEs, who may not have the wherewithal to manage their own imports of these essential inputs.

“The main objective is to make the policy transparent for all investors,” says Dagha, “and second motive is reducing the cost of imported inputs across the board. Currently only large exporters have the ability to access the duty exemptions under various schemes for exports.”

The Federal Board of Revenue is said to have raised some concerns regarding the revenue impact this zero-rating plan will have, but commerce officials say they are confident that they will be able to handle these concerns should they come up during the cabinet discussion. The policy draft states that Pakistan continues to rely heavily on the taxation of foreign trade versus its peers among the export-led countries.

“Import tariffs constitute 13 per cent of the total tax revenues in Pakistan compared to the export-driven economies like Malaysia (1.6pc), Turkey (2pc), Indonesia (2.5pc), South Korea (3.9pc), Thailand (4.3pc) and China (4.6pc). The total revenue collection in Pakistan at the import stage is around 44pc of the entire tax revenues.”

The draft aims to turn tariffs into a policy tool rather than a revenue instrument as they are currently constituted, it argues. But industry stakeholders still have concerns. They argue that the policy aims to link Chinese and Pakistani customs data, which means under-invoicing will no longer be possible. “Imports from China are shown around $14 billion, whereas actually they are closer to $21 billion,” says Zubair Motiwala, a large textile exporter from Karachi.

“If we do this then the requirement for foreign exchange will go up to $21bn to finance imports from China, which will have the net effect of enhancing the duty.” He also points to the Afghan Transit Trade as a crucial area where leakages occur due to large tariff differentials with imports for Pakistani consumption, and says rationalising these should also be part of the policy.

“This is a good policy, but the final draft needs to be shared with the industry stakeholders before it is put before the cabinet.”

Published in Dawn, November 28th, 2018