KARACHI, Dec 30: The Competition Commission of Pakistan has recommended rationalisation of tariff structure of all category of Poly Ethylene Terepthalate (PET) Resins, particularly PET bottle grade, PET film and PET yarn, in order to create a level-playing filed for all competitors in PETBottle and BOPET film markets.

In its recent policy note issued on Dec 28, the CCP has for the first time in its history has given such a note which demands duty slash for ensuring uniformity in duty structure from the Federal Board of Revenue (FBR).

The CCP took notice of concerns raised on classification of PET Resins under Pakistan Customs Tariff Code (PCT Code) and customs duty levied on them under notifications SRO 507(I)/2007 and SRO 678(I)/2010 which, prima facie, give undue duty protection to the sole local manufacturer/supplier of PET Resins. The sole manufacturer is a vertically integrated unit having presence also in downstream market and the policy note examines whether resultant customs duty structure on PET Resin and its downstream products places the competitors at a disadvantage.

PET Resin is a combination of Pure Terephthalic Acid and Mono Ethylene Glycol in a Continuous Polymerization unit, which is subject to custom duty of 3 per cent and 0 per cent, respectively. PET is the basic component used to manufacture different PET Resins such as PET Bottle Grade, PET Film Grade, and PET Yarn Grade etc. PET Bottle Grade is further processed to manufacture PET Bottles, which are largely used in Pakistan for carbonated soft drinks and bottled water. PET Film Grade is processed to manufacture packing, covering, and wrapping material.

The commission observed that the nomenclature/classification of PET Resins or processed PET in Harmonised System Code (HS Code) which is followed all over the world is normally based on; (i) functions of the goods, (ii) polymer they are made from, and (iii) method of manufacturing, which justifies the rate of duty imposed thereon. It has been observed that generally PET Resins are categorised and duty is levied on the basis of their properties, particularly Intrinsic Viscosity.

Another interesting feature that helps to understand the international trend in classification of PET Resins is the manufacturing process. PET Resins (Bottle Grade and Film Grade and yarn grade) are manufactured by using the same type of raw material; Terephthalic Acid, Ethylene Glycol and catalyst, all used in almost same stoichiometric proportion in same process of esterification and polycondensation carried out on the same plant. All three PET resins fall under low viscosity resins category. Standard PET Yarn Grade and PET Film Grade have viscosity of 0.64 dl/g whereas standard PET Bottle Grade has a little higher

viscosity of 0.80dl/g for the reason that it has to go through Solid State Polycondensation Process (SSP) to upgrade amorphous bottle grade chips to high quality bottle grade resin, the CCP noted.

However, in the PCT Code applicable in Pakistan it has been observed that PET Resins have been categorised based on product and not based on a rationale in sync with international trend. Therefore, Film Grade and Yarn Grade, even though have identical viscosity and manufactured through almost similar process using substantially, similar raw materials have been imposed with different customs duty at the rate of 20per cent and 30per cent, respectively.

While reviewing the tariff structure of PET Resins in Pakistan, it is observed that in the year of 2007 duty structure on PET Bottle Grade was reduced from 10 to 7.5 per cent. Later on, customs duty on PET Bottle Grade was increased to 9 per cent.

Fluctuations in customs duty rates have nowhere been rationalised in relevant notifications.

Hence, the commission views that the classification of PET Resins under PCT Code and diverse rates of customs duty levied on them through notifications seem to extend protection to a particular undertaking by imposing discriminatory rates on similar products, which has resulted in a situation of applying dissimilar conditions to equivalent transactions.

Another important aspect observed by the CCP in its policy note with respect to duty structure of PET Resins in Pakistan is adoption of a different tariff escalation modality. Generally, countries provide duty protection by imposing a high tariff on finished goods to restrict their inflow and protect local manufacturers. Whereas comparatively low rate of duty is levied on raw/intermediary material to encourage local production. For example, in case of tobacco industry, imported raw material is charged with 5per cent customs duty whereas finished product is charged with 35pc customs duty as given in the PCT Code.

Similar incidents are found in marble industry, cosmetic industry and many others.

However, in case of PET Resins, customs duty levied on `PET Film Grade’ (raw material) is 20pc and ‘BOPET Film’, which is a finished product it is 20pc. Similarly, customs duty on ‘PET Bottle Grade’ (raw material) is 9pc, whereas ‘PET Preform’ which is an intermediary product it is 20pc and on finished product which is ‘PET Bottle’ the customs duty is 10pc. Such duty structure encourages the imports of finished products rather than giving the incentive to manufacturers to produce locally. In a case where the sole manufacturer of PET Resins also has presence in the downstream market, such duty structure gives it an apparent advantage over its competitors by increasing cost of raw material used for production by other players/ competitors, in the down stream market. The increase in cost of production of competitors may be either through the ability of sole manufacturer to charge higher local prices for the raw material or incidence of higher tariff on raw/intermediary material that makes it difficult for competitors to compete in the downstream markets (BOPET Film and PET Bottle markets).

Duty protection invariably has an impact on the price and sets a higher trend in price. Higher price increases the cost of production of customers. In cases where customers are dependent on sole supplier/manufacturer to procure raw material to meet the local demand and also compete with it in the downstream market, the duty protection restricts competition and is likely to distort a level-playing field in the downstream market. Such restricted competition may set a tendency for supplier cum competitor to engage in exclusionary behaviour and once the competitors are driven out of market, end consumers may fall prey to rent seeking behaviour of a monopolist.

At the conclusion of the policy note the commission stated that it was required under the Competition Act, 2010, to ensure free competition in all spheres of commercial and economic activity to enhance economic efficiency. In pursuance of Section 28 and 29 of the Act, which require the commission to promote competition through advocacy, the commission recommend that tariff structure of PET Resins, particularly PET Bottle Grade, PET Film Grade and PET Yarn Grade, need to be rationalised and slashed down to a uniform rate to eliminate discrimination in terms of classification and rates of duty in order to create a level-playing field for all the competitors.