ISLAMABAD: The commerce ministry has asked the Federal Board of Revenue (FBR) to reduce customs duty rates by up to 72 per cent on 515 items in the fiscal year 2018-19 budget, which the government will present in the National Assembly on April 27.
Meanwhile, the ministry has also announced to sign a revised Free Trade Agreement (FTA) with China next month. Out of the total 7,120 tariff lines, the Commerce Division held out an assurance to China to reduce duties to zero per cent on 6,000 tariff lines while protection will be provided only to the remaining 1,120 tariff lines, mostly textile products.
The duties will be brought down to zero in a period of 15 years in three phases. One-third of these tariff lines will be removed immediately, half of the remaining will be exempted from duties in the next five to seven years while the rest will be eliminated within 15 years.
However, the Federal Board of Revenue (FBR) fears that the proposed massive tax exemptions will cause considerable revenue loss for the country and has estimated a revenue loss of around Rs100 billion per annum in case the second phase of the FTA is implemented.
The summary has been already sent to Prime Minister Shahid Khaqan Abbasi to apprise him over the move of the Commerce Division allowing 75 per cent tariff lines on zero duty to China under the second phase of FTA.
The proposed tariff lines for 515 items are roughly 7.2% of the total tariff lines that are subject to various duties. The proposed tariff rationalisation will improve the competitiveness of leading export sectors including textiles, apparel, leather, spices, chemical products, plastics and articles thereof and iron and steel, according to the commerce ministry.
If the FBR accepts the commerce ministry proposal, it will dent its tax revenues by Rs16 billion. However, the FBR’s overall revenues would not be affected, as the recent 10% devaluation of the rupee against the US dollar would provide huge benefit to the tax authorities.
There are four slabs of custom duties ranging from 3% to 20% excluding the special custom duty rates. The lowest rate is charged on raw materials and the highest on finished products. But there are certain finished goods that become inputs if they are used in production of other goods.
The commerce ministry has proposed to lower tax incidence by one-fifth on 200 tariff lines that are currently subject to 20% customs duty rates. It has proposed to lower the rate to 16% to provide a boost to these industries.
The ministry has also proposed to cut customs duty rates on 32 tariff lines by 31.2%. It has suggested reducing the rates to 11% from 16%. Similarly, it has proposed cutting customs duty on 49 tariff lines by 27.2%. As against current duties rates of 11%, the commerce ministry has proposed to set the rate at 8% for these 49 tariff lines.
The customs duty rates on 28 tariff lines that are currently subject to 11% rate have been proposed to be lowered to 5% – a relief of 54% in the tax burden. The ministry has also recommended slashing the duties on four tariff lines by 72%. Against the existing rate of 11%, the ministry wants only 3% rate for these four items.
Similarly, there are 151 tariff lines for which the commerce ministry has proposed completely eliminating the current 3% customs duty rates. Also, the ministry wants regulatory duties on those 51 tariff lines to be abolished which are also subject to anti-dumping duties.
The ministry undertook a detailed exercise before proposing reductions in duties to make sure that these tariff lines do not reduce the protection available to local industries, said Mohammad Ashraf, the spokesman of the commerce ministry. He also said that the ministry was not in favour of undue protection, which leads to distortions in the market.
The customs duty and special duties have become an important and easy source of revenue generation for the FBR. Any increase in customs duty rates automatically results in an increase in collection of sales tax and withholding taxes, as these taxes are calculated after including all the duties and levies into the price of the goods.
The FBR collects roughly 48% of its total taxes at the import stage, which is also one of the reasons behind fewer efforts in areas where the tax machinery is not able to collect taxes to the true potential. But the export-oriented industries, on the other hand, would have an advantage due to lower prices of raw materials.