TRADE POLICY: IMPACT ON EXPORTS
The targets for export and reduction of deficit of trade balance are ambitious ones
By MUHAMMAD MAHMOOD
IBA - KARACHI
Sep 13 - 19, 1999
The 1999-00 Trade Policy the third one in the present Muslin League Governments tenure aims to improve import and export of the country. Reaction of industry and business community has been a mixed one. Some termed it boon and others raised several objections over it. However majority of the people dealing in business related activities have termed it a positive relief while some have demanded more concessions.;
Governments aims at narrowing down the trade deficit from US $ 1.57 to about US $ 0.8 billion by 30th June, 2000 by increasing exports to US $ 9 billion and limiting imports to US $ 9.8 billion. The Government has based the Trade policy on the following assumptions:
i) Agricultural growth rate of 4.3 percent with cotton crop estimated at 9.7 million bales, and increase in production of fruits and vegetables.
ii) Rice crop of 4.8 million tonnes leaving over 2 million tonnes surplus for exports.
iii) The manufacturing sector growth is expected to be 5.8 percent, yielding significant exportable surplus for value added exports.
iv) Revival of demand for our exports on account of better performance of the economies of our export destinations.
v) Macro-economic stability through sustainable fiscal deficit, low inflation and stable exchange rate.
The trade policy constitutes ongoing and dynamic measures to control the imports and exports of a country. Pakistan, being a member of international trading community, has to take into account demands of international entities. WTO Agreements on Trade Related Investment Measures a smart method of stripping developing countries of economic and political sovereignty require Pakistan to modify laws and rules which link exports with imports or have negative effect on imports.
Traditionally Pakistan had an anti export bias strategy due to its focus on import-substitution strategy. Now the government has embarked upon removal of all barriers, which inhibit exports a task easier said than done. The Finance Minister in his Trade Policy 1999 speech enumerated the following measures taken by the government during last one year for the removal of anti-export bias:
JExporters were provided Export Refinance at 8% per annum i.e. at half the normal lending rates of 15%-16% being charged by the Commercial Banks.
JSales Tax Refunds and Customs Duty drawback were accelerated during the financial year 1998-99.
JDuty Drawback Rates of some 300 items were enhanced.
In addition to direct exporters, indirect exporters, who supply goods to exporters for production, were given the facility of Export Refinance.
JAll direct and indirect exporters were provided the facility to import inputs through No Duty No Drawback (NDND), Manufacturing in Bond and other Temporary Import Schemes without payment of customs duty, sales tax and withholding of income tax.
JCBR was tasked to develop Exporters profiles for facilitating prompt sales tax refunds and duty drawbacks to exporters.
JA system for inspection of all rice shipments to ensure quality exports was initiated by the Ministry of Commerce in consultation with the Rice Exporters Association of Pakistan in April 1999. This system is effective from 1st July 1999.
JNo-Duty No-Drawback Scheme was further simplified and the ambit of the Common Bonded Manufacturing Warehouse Scheme has been extended to cover indirect exporters and Small and Medium Enterprises (SMEs).
JA total of 114 Duty Drawback Notifications were consolidated to 4 notifications, by clubbing various sectors to facilitate exports.
JExports to Afghanistan were allowed against Pak rupees.
Trade Policy is an instrument for promoting exports on sound fundamentals but the efforts to increase exports in the recent years did not bear fruit due to one reason or the other. During the last five years, exports have stagnated to around $8 billion while the export base remained narrow being concentrated in relatively low value added products. In 1998-99, the exports declined by 10.5 percent over the previous year approximately, 80 percent of this reduction is due to unit value and the remaining about 20 percent due to reduction in quantity. Pakistans exports to all countries declined except United States of America, which showed increase in exports by 3.9 percent only. All major export commodity groups received a setback: Textile Manufacturers declined by 11.8 percent, other Manufacturers by 16.1 percent and Primary Commodities by 21.6 percent.
The need to expand and diversify the export base and upgrade its productive capacity is the need of the hour. Keeping in view this objective, the Government has already extended Income Tax concessions to various export-related activities in Trade Policy 1999-2000 as mentioned below:
Contracting and consultancy services: To increase export of engineering, contracting and consultancy services, the foreign exchange income through such contracts will be charged income tax at the rate of 1 percent.
Buying Houses and Export Indenting Houses: To encourage Buying Houses and Export Indenting House operations, the income from commission for their services will be treated as export earnings and taxed as export of the same product.
Rice Exports: Export of rice is at present taxed for income at 1 percent. Export of branded rice up to 5 kilogram packs, income tax will now be charged @ 0.5 percent.
Fish and food items: In order to exploit and add value to the export of fish and other food items, income tax for canned and bottled fish (including seafood) and other food items will be levied @ 0.5 percent as against 0.75 percent to 1 percent charged at present.
Canned food: A depreciation allowance of 90 percent will be allowed in the first year for income tax assessment, to the canned and bottled food exports to promote the development of export of canned food. This would mean a virtual exemption from income tax for about four to five years.
Exports of semiprecious stones: Most of the gems and a large proportion of jewellery are smuggled out of Pakistan. To encourage bona fide exports of rough, uncut, cut or polished precious or semiprecious stones, that income tax on exports of such stones will be charged @ 0.5 percent instead of the present 1 percent. The import of rough, uncut, cut or polished semiprecious stones for re-export, without involving foreign exchange of the country, will be allowed duty free as was done previously.
Crushed bones: The regulatory duties on export of crushed bones and steamed bones are reduced from 20 percent to 10 percent and from 15 percent to 5 percent respectively.
In the view of Federal Chamber of Commerce and Industry (FPCCI) office-bearers, various tax concessions, incentives and relief to expand and diversify the export announced in Trade Policy 1999-00 would gear up investment, exports and growth process in an effective manner.
Various dispensations about exchange rate for exporters, refund of sales tax and duty drawbacks, recognition of indirect exporters and giving them all facilities available to direct exporters, withdrawal of advance income tax on imports for export production, duty free imported inputs, common manufacturing bonds for Small and Medium Enterprises (SMEs), removal of all restrictions on exports and providing more incentives and relief to expand and diversify the export base, are welcomed by the business community.
Import of raw material: Exporters who are manufacturers can also import their raw material requirements under certain Temporary Import Schemes without payment of duties. Exporters will now be allowed to meet their raw material requirements from Public Bonded Warehouses without payment of duties and taxes. Polyester Staple Fibre: Polyester Staple Fibre (PSF) was temporarily included in the NDND Scheme in the last Trade Policy. PSF in the NDND Scheme is included in Trade Policy 1999-00 as well.
Previously, the local textile industry was paying up to 35 percent more than the international price for PSF due to restrictive duties on PSF imports and exorbitant prices charged by the local PSF manufacturers. By inclusion of PSF in NDND scheme, the local textile industry will be assured PSF at internally competitive prices.
Export finance of below 30 count yarn: Export refinance facility allowed for all yarns of less than 30 counts expiring on 30th June 1999 has been extended to 31st December 1999.
The government should have given more emphasis to export of value-added items in this sector enabling the country to earn more and more foreign exchange, still the extension in the facility of export refinance on cotton yarn of less than 30 counts will help to a great extent.
Tax free imports of machinery and equipment: Duty and sales tax free imports are allowed for plant, machinery and equipment, not manufactured locally for rice processing industry and cotton ginning units, plastic fishing crates used in fish processing, refrigerated trucks and delivery vans required in poultry, dairy farming, fishing, fruit and vegetables and perishable commodities industries but not produced locally.
Consumable spares: For many consumable spares like shaving blades, embossing plates, felts, belts, buffing papers etc. used in production of various leather products. The sales tax paid on these goods is not refunded or allowed adjustment. The sales tax paid on these consumable would now be either refunded or allowed adjustment in case the unit is producing sales taxable products and is registered under Sales Tax Act.
Courier services: On exports through courier services, post and passengers accompanied and unaccompanied baggage on declaration on "E" Form duty drawback will be allowed as per prescribed rates, up to a maximum of 5 percent.
Re-export of dry fruit: Dry fruit from Afghanistan is allowed clearance against Indemnity Bond and counter-guaranteed from Chamber concerned for packing and re-exports.
Pre-shipment Authorisation Certifi cate: To simplify the export procedures for textiles, Pre-shipment Authorisation Certificate from the EPB for exports of textile items to Non-quota Countries is now removed.
The targets for export and reduction of deficit of trade balance are ambitious ones. Some of the assumptions on which the trade policy is based may prove to be elusive. Resurgence of commodity prices is not visible in the near future and the increase in exports would hardly be achievable in view of a low cotton crop. Due to rising prices of oil in international market the import bill has all the ingredients of surpassing the target set by the government. The proposal for levy of General Sales Tax (GST) on gas and electricity will increase the cost of production, making it harder for our products to compete in international markets.
The developed countries being able to dump their goods at lower prices due to efficiencies of mass production, technologically efficient machines, availability of large capital and subsidising the exports with tax deductions would surely give tough competition to the local industry. In the present milieu of developed countries placing restrictions on imports from developing countries through quota restrictions, anti-dumping treaties, voluntary restrains on pretexts like use of child labour, insufficient progress on environmental standards, human rights violations, Pakistans exports will have to struggle really hard in the world market.
Textile forms more than 60 percent of exports of Pakistan. The trade policy has incorporated all the major proposals and suggestions made by the textile industry for revival of its operations and enhancement of exports. However textile sector will have to concentrate on export of value addition products rather than exports of the raw products the practice which has been so far adopted by the textile industry particularly, in view of the recession in the international market.B