ISLAMABAD: Ministry of Commerce (MoC) has uploaded National Tariff Policy (NTP) 2025-30 according to which tariff reforms would have exports will increase by (10-14%); imports will also increase (by 5-6%) but at a slower rate than the increase in exports thereby improving the trade deficit.
According to the Policy, to set some benchmark for tariff rationalization that is reasonable as well as easy to communicate and measure, existing tariffs in regional counterparts are considered. The NTP 2025-30 sets a target of achieving a simple average tariff of 9.70% by the terminal year 2029-30. This corresponds to about more than 20% annual decline in the first two years and a 5-10% annual decrease in subsequent years. This will be done by taking a comprehensive approach that encompasses 1) Readjustment of CD slabs to 4 slabs (0%,5%,10%, &15%) from the existing 5 slabs in 5 years 2) Reduction in CD to a maximum of 15% in 5 years 3) Elimination of RDs in 5 years 4) Elimination of ACDs in 4 years 5) Phasing out of 5th Schedule in 5 years The reduction in tariff rates will bring the trade weighted average from the current 10.6% to below 6% in a period of 5 years.
The current tariff structure follows a cascading principle. There are 5 slabs i.e.0, 3, 11, 16, and 20 with some peaks and specific rates. The uneven spread in tariff slabs or tariff escalation not only inhibits industrialization but also diversification. To simplify tariff structure and remove uneven spread between tariff slabs, in the first year, the current tariff slabs of 0%, 3%, 11%, 16% and 20% will be adjusted as 0%, 5%, 10%, 15% and 20%. Peaks in tariffs above 20%, mainly in the auto sector, will also be reduced gradually.
Over the last 15 years, ACD and RD in addition to Customs Duty (CD) have been used as a tool for revenue enhancement. As a result, the number of products subject to ACD and RD has increased manifolds. Out of a total of 7,589 tariff lines, around 7,476 tariff lines are subject to ACDs, and 1,996 tariff lines have been subject to RDs. Excessive use of Additional Customs Duties (ACDs) and Regulatory Duties (RDs) in addition to already high Customs Duties (CDs) has not just made the tariff structure high, complex, and protective but unfair, non-transparent, and prone to elite capture. All ACDs will be eliminated gradually in the next 4 years.
Few products at 35% CD are subject to Auto sector policy (AIDEP 2021-26), therefore, the auto sector ACDs will be eliminated gradually from July 1, 2026.
RDs are mostly serving the purpose of raising revenues and providing extra protection to already protected industries. Moreover, the ad-hoc imposition of RDs over time has resulted in overall discriminatory tariffs which is evident from high dispersion in RD rates on similar products. First, the RD rates will be harmonized as lowest on raw material, moderate on intermediate and capital goods and highest on consumer goods and will be placed in slabs of 0%, 5%, 10%, 15%, 20%, 30%, 40% and 50%. Moving forward, the following schedule will be followed to eliminate RDs in 5 years. The rates given in Table 4 are indicative and actual RD rates will be adjusted in the same range (indicated against each year) by the Tariff Policy Board and the government on year-to year basis.
The existing RDs slabs will be completely eliminated in 5 years, keeping in view the annual targets for reduction in RD rates.
The 5th Schedule of the Customs Tariff provides concessions or exemptions to certain domestic industries. Starting from a few products in 2013, the number of products claiming concessions or exemptions under the 5th schedule has increased many folds during the last few years. It consists of a long list of products divided into different parts. In FY 2023-24 the 5th Schedule consists of eight parts, each part contains different tables for different types of products. However, what makes the 5th Schedule more complex is the various conditions attached to the listed products. The product specific conditions under the 5th schedule require a wide range of documentation and paperwork. This not only gives huge discretionary powers to EDB and IOCO but also increases cost of compliance. Moreover, as most of the concessions are available only to specific manufacturers, these conditions are seen as restrictive and biased towards large businesses and manufacturers. Small businesses that cannot incur costs for attaining certificates or approvals and related paperwork have to purchase inputs from commercial importers that import at MFN rates.
The tariff structure under the Fifth Schedule is different from general tariff structure. There are two ways in which tariffs under the Fifth Schedule are different from the general tariff structure. First, the 5 th Schedule has custom duty rates beyond the slabs applicable to the 1st Schedule. Second, most of the products in the schedule are exempt from Regulatory Duty (RD) and Additional Custom Duty (ACD) that are otherwise applied in the 1st Schedule of Customs Act, 1969. Resultantly, as the number of exemptions and concessions under the 5th Schedule has increased over the years, its burden on the federal exchequer is also growing exponentially. The largest portion of customs duty expenditure for FY 2022-23 is given under Fifth Schedule amounting PKR 190.688 billion registering a growth of 10.24% compared to 2021-22.
In view of distortions in tariff structure created by the 5th Schedule, all the products/tariff lines will transition from 5th Schedule to 1st Schedule in next 4-5 years in a phased manner. In this process some concessions will be withdrawn, and some concessions will be generalized (made available to all) ;( i) the products that have virtually no concession under the 5th Schedule shall be transferred to the 1st Schedule ;(ii) products with concessionary rates will be transferred to the 1st Schedule either under MFN rate or under the slab closest to the concessionary rate ;(iii) products that have specific conditions because there is no product-specific tariff heading in the 1st t Schedule will be moved to the 1st Schedule by creating a new tariff heading ;( iv) products falling under the tariff heading “others” will be transferred from the 5th Schedule to 1st Schedule by creating separate headings with the description as given in the 5th Schedule ; and ( v) Minimally used concessions will be withdrawn.
In line with the principles and objectives of this policy, the auto sector tariffs will also be rationalized to enhance competitiveness, productivity and consumer welfare including removing any quantitative restrictions on import of old/used vehicles subject to quality and environmental standards and differential tariff structure. The Auto Industry Development and Export Policy (AIDEP) 2021-26 is valid till June 2026 and the new auto policy will be introduced from first July 2026 where a substantial reduction on duties related to the auto sector will be carried out including review of SRO 655 (I)/2006 dated 22-Jun-2006, SRO 656(I)/2006 dated 22- Jun-2006, SRO 693 (I)/2006 dated 1-Jul-2006, elimination of all ACDs and RDs and reduction in the CD rates.
Various models including Macro model, Export Forecasting Model, Global Trade Analysis Project ( GTAP) Model import tariff revenues show a loss of about PKR 500 billion in static calculations however, considering all other factors i.e., increased demand, economic growth, transparency, decrease in under invoicing, smuggling, compliance cost etc., GTAP calculations indicate a positive impact on revenues (7-9%).
The major impact of tariff reforms will be on exports. GTAP calculations show that exports will increase by (10-14%); imports will also increase (by 5-6%) but at a slower rate than the increase in exports thereby improving the trade deficit. Resources will move to more efficient and productive sectors as production in export-oriented sectors will pick up. Industry will grow, net employment will increase, and investment will strengthen. Reduced tariffs would not only allow the availability of cheap raw materials and intermediate but would also be a key factor in reducing the imported inflation, especially for food products. Ends
