Withdrawal of duty exemptions: SRO reforms – levelling the playing field

As exercise enters last phase, no objectives seem to have been met.

ISLAMABAD: A major reform process initiated by the current government, at the behest of IMF, was to eliminate Statutory Regulatory Orders (SROs), which provide exceptions or partial exemptions from normal tariffs or import duties and taxes.

The proposed elimination of SROs would be completed over a three-year period starting with the budget of 2014-15 and ending with the forthcoming budget of 2016-17. Now that the process is about to be completed, it is high time that the government conducts a review to assess its success.

While launching the exercise, the government claimed that not only a level playing field would be restored for all the industrial players, small or large, but also the country’s exchequer would benefit substantially. This would be because even though the customs duty was around 15% on the average, actual collection was only a third of that.

Similarly, sales tax collection would be restored to its original value of 17%, rather than an effective 9.4%.

The planned elimination of SROs was welcomed as a great initiative, as many felt that at long last there would be more transparency and equitable treatment for all, and the government would stop picking winners and losers, with market forces deciding the outcome.

Now that the exercise is entering its last phase, none of the objectives seem to have been achieved. The preferential treatment of industries backed by influential lobbies such as the All Pakistan Textile Mills Association (Aptma) and Pakistan Automotive Manufacturers Association (Pama) has continued as none of the SROs favouring those industries have been touched.

If anything, the concessionary regime for them was further expanded. As a special case, exemption on import of textile machinery (but not any other machinery) was extended. Similarly, none of the SROs for the automotive industry were eliminated. On the contrary, their scope was further expanded to provide special concessions to new investors.

Similarly, concessions for some social sectors such as machinery and equipment imported by hospitals and medical or diagnostic institutes, which have been maintained, continue to be conditional upon bureaucratic procedures such as production of certificates from the Board of Investment.

Likewise, concessions to the agriculture sector such as machinery for agro-processing have been made conditional upon production of certificates from the Ministry of National Food Security and Research.

Thus, the purpose of reform meant to allow the same rate for all users has been nullified by imposing such conditions and allowing tariff concessions to only selected users. In several cases, the long established tariff concessions were either done away with or their scope substantially reduced.

For example, certain essential agriculture machinery such as for harvesting and threshing, milk chillers, milk processing, fish processing and geo-synthetic films for greenhouse farming which used to be importable free of duty are now subject to 5% or higher customs duty.

The unfortunate sector

Telecom is another unfortunate sector. The concessionary rate of 5% allowed to this sector on import of machinery for over a decade had played a prominent role in attracting foreign investment.

After the withdrawal of the concessionary rate in 2014 budget, duty rates have been enhanced on telecom machinery by 100% to 500% depending upon the nature of items being imported. The average rate has been raised by almost 400%.

Thus, the government has determined in its wisdom that promotion of internet in the country is not a priority while that of production of textiles or automobiles is.

Consumer goods

Furthermore, by providing higher protection to particular sectors through regulatory duties under SRO 568(1)/2014 on the pretext of restricting “luxury goods”, the government has all through its tenure been favouring those producing such goods.

For example, local producers of consumer goods such as air conditioners, refrigerators, microwave ovens, fruit mixers, cosmetics, baby diapers, iron and steel bars and hundreds of other such products which had already enjoyed high protection started benefitting even more than they did before the reform process started three years ago.

The analysis so far shows that SROs in favour of industries backed by powerful lobbies have not been touched while for several other sectors that can promote exports, enable social sectors such as health, education, environment and telecommunication to have cheaper access to imported machinery and equipment have been either eliminated or made conditional upon bureaucratic controls.

Other big loser is the services sectors such as outsourcing, call centres and tourism.

When the new budget is presented, it will become apparent as to which other sector becomes victim to this “reform”. However, one thing seems certain that preferential treatment for powerful sectors would remain in place as would protection to producers of “luxury goods”.

The writer served as Pakistan’s ambassador to WTO from 2002 to 2008

Published in The Express Tribune, May 16^th, 2016.

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