'52% duty cut to boost exports'

ISLAMABAD:

The government on Wednesday claimed a drastic 52% cut in import duties will lead to exports rising faster than imports, while revenues will grow by one-tenth. However, it admitted these projections are based on calculations by the World Bank.

Proceedings of the National Assembly Standing Committee on Finance revealed that the government is venturing into uncharted territory, largely relying on the World Bank's Global Trade Analysis Project (GTAP) model.

The committee was briefed by the Ministry of Commerce on the new National Tariff Policy, which is being described as "Pakistan's East Asia moment" aimed at increasing exports and reducing the trade deficit.

Under the new policy, the average applied tariff rate will fall from 20.2% to 9.7% over five years — a 52% drop — Secretary Commerce Jawad Paul told the committee. He claimed exports will rise at twice the pace of imports due to tariff reforms.

According to the GTAP model, exports are expected to grow 10-14%, while imports would rise only 5-6%, said Paul, adding this would help improve the trade deficit despite a lower protection level.

When asked about these projections, Finance Minister Muhammad Aurangzeb said, "These are assumptions — some may work and some may not."

Leader of the Opposition Omar Ayub Khan raised concerns about the implications of reduced tariffs on reserves, inflation, exports, and imports. He questioned the assumptions behind the optimistic forecast and asked how such drastic tariff cuts could lead to higher exports without hurting reserves.

The government failed to provide clear answers and admitted that the World Bank developed the numbers using its GTAP model. Khan demanded the model be shared with the committee.

The government did not present the model at the meeting and instead promised a separate briefing by the World Bank and commerce minister. Khan insisted the briefing be open to the media, but Aurangzeb said the World Bank may not agree.

Concerns were raised over foreign consultants using a one-size-fits-all approach that ignores Pakistan's ground realities. Officials from the finance ministry, Federal Board of Revenue (FBR), and commerce ministry could not clearly explain the impact on inflation, imports, reserves, or fiscal balance.

"Trade tariff reform will be painful as inefficient firms will shut down," said FBR Chairman Rashid Langrial.

Secretary commerce said that in the first year (FY26), the tariff rate would drop to 15.7%, cutting the protection wall by 22.3%. This will be achieved by reducing average custom duty to 11.2%, additional custom duty to 1.8%, and regulatory duty to 2.7%.

PPP MNA Nafisa Shah noted that while the world is moving towards protectionism, Pakistan is granting unilateral concessions by reducing tariffs.

Pakistan's issue has been high tariffs, and despite concerns, there is a need to lower protection under the Most Favoured Nation (MFN) regime of the World Trade Organisation (WTO), said Paul.

He added that financial resources will shift to efficient sectors as export production increases. The industry will expand, jobs will grow, and investment will strengthen.

The committee was told revenues would rise 7-9%, versus an estimated Rs500 billion loss in static calculations.

For FY25, the FBR projects a net revenue gain of Rs47 billion, factoring in a Rs235 billion hit from tariff cuts. Gains would come from other changes, including Rs27 billion from easing age limits for used car imports.

Paul said various models including macro, export forecasting, and GTAP showed a Rs500 billion static loss from tariff changes. But when adjusting for factors like demand, transparency, smuggling reduction, and compliance costs, GTAP forecasts a 7-9% revenue gain.

He said three additional goals are part of the new tariff policy: export-led growth through level playing fields; support for green initiatives and energy-efficient industry; and promotion of advanced technologies like AI, robotics, nanotech, electronics, and chemicals.

Additional customs duties will be phased out in four years, regulatory duties in five years, and exemptions within five years. The number of slabs will shrink to four, with a top rate of 15% within five years.

Auto sector products with 35% custom duty are covered under the Auto Policy. These duties will be phased out from July 1, 2026, said Paul. Auto sector tariffs will be rationalised to enhance competition, productivity, and consumer welfare.

Quantitative import restrictions on old and used vehicles, subject to quality and environmental standards, and the differential tariff structure will also be eliminated.

A new Auto Policy will begin July 1, 2026, featuring major duty reductions and review of SRO 655, SRO 656, and removal of all ACDs and RDs.

Products with no concessions under the 5th Schedule will move to the 1st Schedule. Items with concessionary rates will also shift to the 1st Schedule, either under MFN rates or the closest existing slab.

The FBR and commerce ministry assured the committee that no new duties will be imposed on agricultural machinery and that all existing duties are trending downward.

Finance Minister Aurangzeb said a committee under his chairmanship has been formed to monitor implementation of the new tariff policy and make adjustments as needed.

"If raw material tariffs are reduced, it will help, otherwise industries will collapse," said PTI's Mubeen Arif Jutt.

Immediate changes

In the budget, the commerce ministry has proposed eliminating the 2% additional duty on zero custom duty slabs, affecting 2,156 tariff lines. The 3% custom duty will drop to 0%, lowering costs on 896 tariff lines. Similarly, the 11% CD will fall to 10% on 1,023 lines, and the 16% CD will reduce to 15% for 486 lines.

Additional custom duty rates have been cut by 1% for the 7% slab; the 6% rate drops to 4%, and the 4% rate drops to 2%. The 2% ACD slab has been scrapped entirely.