The Tariff Tripod of Pakistan: Protection, Export Promotion, and Revenue Generation

Jamil Nasir


This paper gives an overview of tariff structure of Pakistan.
The protection of local industry, export promotion and revenue
generation constitute the triangular tripod of Pakistan tariff. The said
three objectives are achieved mainly through imposition of high tariffs
on output goods (protection of local industry), duty- exemption schemes
and SROs for exporters (export promotion), and multiple levies at import
stage on tariff-inclusive price (revenue generation). About half of the
revenue of FBR is collected from imports. Protection to sectors like
auto and textile is high and consumer welfare is totally missing from
the entire scheme of tariff. Despite high protection and multiple export
promotion schemes, local manufacturing is weak and exports are stagnant.
The revenue has, however, increased manifold over the years and
interestingly revenue witnessed big upward jump when MFN rates of tariff
fell. Revenue generation is the major consideration in tariff setting.
Tariffs are set as an exercise in accounting with the assumption that
rates and revenue have got a positive linear relationship. Income
effect, substitution effect and volume effect hardly enter into the
mental calculations of tariff setters. Due to high incidence of taxes at
import stage, incentives for smuggling, under- invoicing,
misdeclaration, and evasion are high. Smuggling is rampant and hard to
control due to peculiar geographic situation of Pakistan.
Under-invoicing is clear from the trade gap between China and Pakistan.
As regards misdeclaration, evasion and corruption at ports, I calculate
a hypothetical value of CD based on TWA and CEF for the period 1997-98
to 2018-19. These calculations provide interesting policy insights.
First, evasion through misdeclaration is high when tariff rates are high
and evasion goes down in percentage terms with reduction in tariff
rates. Second, CEF increases as a result of reforms in Customs like
simplification and automation of clearance processes and procedures.
After detailed discussion, paper suggests that protection provided to
the local industry should be time-bound with clear sunset date and
accountability against rent -seeking. Based on cap-cape equation, paper
further suggests that exemptions and concessions in import duties should
preferably be provided through tariff code and not through SROs and
difficult-to-use export-oriented schemes. In order to put the country on
the trajectory of long term growth, import tariffs on input goods and
machinery should be phased out in the short to medium term and instead
of relying on increase in tariff rates and imposition of additional
levies on imports, better policy option is to enhance CEF through
reforms aimed at risk based automated clearances. Keywords: Tariff
Structure, Protection, Under-invoicing, Misdeclaration, Smuggling, Input
goods, Output goods, Collection Efficiency Factor

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