Threatened by tariff discrepancies, corruption and smuggling
By AMANULLAH BASHAR
Jun 19 - 25, 2000
The proliferation of Information Technology across the globe has opened new dimensions for the electronics industry especially for those countries having a sound industrial base in this particular industry.
It is however unfortunate that except a few cosmetic steps, no genuine efforts were made to establish this important industry in Pakistan. Currently, Pakistan is merely involved in assembling the electronics goods, especially the TV sets, while major manufacturers are not producing radios, which still have a large market in our rural areas.
Unlike automobile industry, there was no deletion policy adopted in electronics industry as a result of which transfer of technology did not take place. All major components in electronics industry are imported. This situation indicates that even large multinational companies assembling TV sets are as a matter of fact engaged in import business, as they are actually selling the imported parts just after giving them the shape of an assembled product. Sources said that the picture tube, the main component used in TV manufacturing is not produced within Pakistan and the entire electronics industry is using the imported components.
As far as electrical appliances are concerned, Refrigerators, Deep Freezers, Air conditioners are being manufactured within the country, yet the industry is depending on imported Compressors for manufacturing these items. Pakistan has a considerable market for a host of electrical items almost all of them are being imported or smuggled into Pakistan. One of the major reasons for not developing the local industry is the culture of giving preference to the imported goods as compared to those produced locally. One should however accept the harsh fact that usually the poor quality goods produced locally were enough to shift the interest of the consumers towards the imported goods.
Spelling out the facts which gave way to the menace of smuggling in Pakistan, specially the electronics goods; sources identified the double standards of duty structure for Karachi and Sust borders at Karakuram (Silk Road), as the loophole of this industry.
Describing the official discrimination in tariff rates as one of the major concerns of the electronic industry and the business community engaged in import business.
The import of energy saver bulbs, is the glaring example of this discrimination between Karachi and the Sust Border. The duty rate for energy saver bulbs is one dollar for Karachi while it is merely 35 cents at Sust Border.
Abdul Khalique Jafarani, Chairman, Pakistan Electrical & Electronics Merchants Association (PEEMA) while talking to Page on this issue described this discrimination as a sort of smuggling under official cover.
Corruption at Customs stage where undue discount on import price and quantity discount and lower ITP valuation is given to the favourites are dragging down the local electronics industry, said Sarfrazuddin, Chairman of Pakistan Electronics Manufacturers Association.
Although the National Accountability Bureau (NAB) has taken action against the corrupt in CBR yet action again certain people involved in gross violations was still awaited. These elements openly violated the rules and their names are with the NAB but action has not been taken against them for the reasons best known to the authorities.
Sarfraz feels that rampant corruption, under invoicing, and of course the smuggled electronics goods and electrical appliances which have flooded the local markets are the major concerns of the electronics industry in Pakistan.
Welcoming the steps taken by the present government for documentation of the economy and the present campaign launched for Tax Survey, Sarfraz fully supported the government stance to bring the black economy into the tax net. The wild and free undocumented economy is another major hurdle in the proper growth of the regular industry already in the tax net. Instead of sharing the socio-economic responsibility, those out of tax net are in fact trying to put the entire burden on the formal economy. This is quite unfair. Even the immunity scheme announced by the government is a sort of favour to the black economy as under this scheme those who had always evaded the taxes would whiten their black money only after paying a 10 per cent of the declared money. This gives a bad taste to the regular taxpayers that paid their taxes in all those years while those who were outside the ambit enjoyed the tax evasion.
Sarfaraz, however, expressed the hope that with the firm determination of the present government to bring the informal economy into documentation will improve the situation both in the public and private sector.
Apprising the prevailing situation, the representatives of the electronics industry have written to the government that due to inconsistent policies and rampant smuggling of Television sets, the local industry has been adversely affected.
Since Radio sets manufacturing has almost come to zero level, the electronics industry is merely confined to production of Television sets in Pakistan.
Despite the fact that some big multinational companies are engaged in this business the electronics industry is not capable to produce television sets with local components. A very insignificant percentage of deletion has been achieve by this industry, otherwise the major and basic components are still being imported even after passage of 50 years in Pakistan.
Following production chart of television sets gives a real picture about the total strength of the electronics industry in Pakistan.
Yearwise comparison of production/ revenue
The above figures regarding level production and revenue contributed by the industry can be taken as a perfect case to see as to how the exorbitant taxes affects the growth of production and revenues. For example, in the year 1996-97 there was a 10 per cent regulatory duty, 18 per cent sale tax and 5 per cent central excise duty imposed on this industry. In that year the volume of production as well as revenue contribution both were at the lowest ebb. In the year 1997-98, there was a general withdrawal of regulatory duty and a general reduction of Sales Tax from 18 per cent to 12.5 per cent and waiver of Central Excise duty. These withdrawals altogether brought a positive change both in volume of production as well as revenue contributions reflected in the chart. In 1998-99, the government went a step ahead by reducing import duty to 5 per cent on five major components, which produced encouraging results. The reduction in tariff regime did not hurt to the receivables of the government. Instead these positive steps gave a quantum jump to the revenue from Rs290,540,000 to Rs499,840,000 in the current year. The outcome of these tax reforms introduced in the electronics industry proves that lowers the tax rate higher the volume of tax paid by the people. This pattern can be taken as a model for rest of the tax regime for enhancing the overall tax net in this country.
Welcoming the government's crusade against smugglers and illegal traders, the electronics industry has suggested to the government to review its policy for providing more incentives/ concessions to the industry. Acknowledging the efforts of the government through remedial measures and incentives allowed to the industry in the past, the industry representatives observed that the steps did help not only to survive during those difficult days but also were able to generate comparatively higher revenues for the national exchequer.
In the face of the current challenges unduly arresting the growth of the electronics industry, Pakistan Electronics Manufacturers Association (PEMA) has strongly recommended to the government to bring down the current rate of duty from 5 per cent to zero level. PEMA feels that if the suggestions were approved, it would counter effectively the illegal trade and other ills besides giving a strong production base to the electronics industry in Pakistan.
Currently, following is the duty structure on the following basic components imported by the electronics industry:
Duty Rate Recommended Rate
Elaborating the benefits expected out of above recommendations sent to Abdul Razzaq Dawood, the Federal Minister for Commerce and Industry, Sarfrazuddin, Chairman, PEMA told PAGE that with the implementation of these recommendations, the electronics industry in Pakistan would produce the following results.
• Current production level could be doubled.
• Employment for thousands & thousands skilled and non-skilled could be created.
• Current revenues for the government from the local TV Industry would increase manifold.
If implemented, the recommended incentives would enable the local industry to compete effectively with the smuggled TV sets thus helping Government in eliminating the menace of this illegal trade from the country.
This would ensure availability of quality products at competitive prices.
Recalling the bad days when the electronics industry was passing through one of the worst period of its history, Sarfrazuddin said that in 1997, PEMA launched a very aggressive campaign against smuggled Japanese popular brands of TV sets and took some unprecedented drastic actions. So much so, it forced/ compelled the dealers to boycott sale of smuggled TV sets.
The government did not only appreciate the crusade launched by PEMA but it also helped and supported the electronics industry. Due to serious and continuous efforts of PEMA to create awareness among the dealers and consumers abut the adverse impact of smuggling on the economy of this country and also on the local industry, the industry has achieved encouraging results. One of the positive outcomes of this campaign was arrival of a popular TV brand into local production. Earlier this brand was involved in large scale smuggling into Pakistan market. This company decided to produce its brand locally by acquiring the industrial facilities of an idle member industry. As a result of that one of the sick units was also revived to production. That company set a good example for other brands which also followed suit. Sarfraz said that this industry therefore proudly helped in generating unprecedented revenues to the national exchequer by way of:
Increasing local production significantly
Indirectly forcing the smugglers to use legal channels thus helping in generating revenues on imports which hitherto was not coming.
The PEMA Chairman however conceded that the success and the achievements of this industry were not possible without help the and support from government by way of fiscal incentives announced in 1998.
He observed that local production of TV sets because of the facts mentioned above increased from 72000 in 1996/97 to 288,834 in 1999-2000 resulting in sharp increase in revenue from Rs290.0 million in 1996-97 to Rs499.8 million in 1999-2000. It is worth to mention that government did not suffer any loss of revenue because of reduction in duty but in fact benefited considerably.
He said that during various meetings with the Central Board of Revenue in the past while agreeing to the current tariff structure for this industry, it was agreed that government would favourably consider industry's recommendations. The significant point of the recommendations emphasize for reducing duty on five components to zero per cent provided the industry generated the same revenue to the government.
Abdul Khalique Jafrani, Chairman of Pakistan Electrical Electronics Merchants Association (PEEMA) spelt out his views about what he called official smuggling through Sust Check Post. He said that all over Pakistan all commercial importers and industrial importers are registered in Sales Tax Department and they are issued Registration Number. However, at Sust check post the importers are not registered nor issued Registration Nos. from Sales Tax Department. Customs are clearing cargo to these unregistered importers at Sust Border without sales tax numbers. Even there is no record about the volume of import through that border. As against that at Karachi and other Dry ports the importers have to file returns every month and they have also to maintain the input and output registers. Why the Sust border importers are exempted of this formality. Jafarani described this practice as a clear case of smuggling under the official patronage hence damaging and harming the national exchequer depriving it of hundred of millions rupees every month.
Jafarani said those incorrect declarations of value, false and improper quantity and description of goods imported from China through Customs post at Sust border are still in practice. He observed that at Sust border neither complete description of imported goods is recorded in the bills of neither entry nor the normal values or values fixed under Section 25B of the Customs Act 1969 are applied. He demanded of the present government that to prevent this gross irregularity, all goods should be imported through Sea route and if the Sust importers want to transit their goods they can take the cargo to Rawalpindi or other dry ports from Karachi.
The PEEMA chairman strongly urged the government that taxes should be collected equally in all parts of the country. In case the equality is not restored and all the segments of the business class were not treated at par, the government may lose its credibility resulting a huge loss of in the shape of moral values as well as national income.
He also suggested that the issue of Sust border affecting the overall trade in electronics and electrical appliances should be discussed with customs authorities in China. They may be requested to supply the copies of export manifest/ export bills filed by the exporters showing the appropriate value, quantity and description of goods and the assessment in Pakistan may be made as per these documents.
Goods consigned for areas other than northern areas may be examined and assessed at Dry port Rawalpindi or Islamabad. The customs officials at Sust shall seal the containers and accompany the consignments to Rawalpindi Dry port where these shall be released after filing of correct declaration and payment of correct amount of duties and taxes.
Competent, trust worthy staff having know how of customs appraisement be posted at Sust border who shall examine the goods as per Examination Manual issued by the Central Board of Revenue and apply the correct values for assessment purposes.
Since most of the electronics goods imported at Sust borders ultimately find their way into Karachi and other major markets of the country. This on going practice is rendering the genuine importers incompetitive in the market. If the situation allowed prevailing, the total import of electronic goods will naturally divert from Karachi to Sust border, as there seems to be no wisdom in competing with smuggled goods after importing at costly duty rates.