New tariff policy – have we liberalised enough?
The new National Tariff Policy (2025-30), as revealed by the Finance Act 2025, budget speech and FBR notifications, aims to enhance the competitiveness of the manufacturing sector, including exports, by providing cheaper access to imported raw materials and intermediate goods through a rationalised tariff structure. This policy is designed to increase employment opportunities, improve consumer welfare, and remove anomalies in the tariff structure that cause distortions between sectors and within value chains.
The new tariff policy will lead to the reduction of average effective customs tariff from 20.19% to 9.70% over five years. This reduction will be achieved by readjusting the customs duty (CD) slabs to four levels: 0%, 5%, 10%, and 15%, down from the existing five slabs. The maximum CD rate will be reduced to 15% within five years, and regulatory duties (RDs) and additional customs duties (ACDs) will be eliminated within five and four years, respectively.
The policy outlines specific targets for tariff rationalisation. For instance, the base year for these changes is 2024-25, excluding Chapter 27 of the First Schedule to the Customs Act, 1968. The existing five CD slabs will be transformed into four slabs over five years, with annual targets for reducing CD rates. The elimination of ACDs will follow a similar timeline, with a gradual reduction in ACD rates for products subject to the auto sector policy (AIDEP 2021-26) starting from July 1, 2026. The RD slabs will be completely eliminated within five years.
Our team has analysed the revised tariff structure thoroughly, and while we will publish these results in a report shortly, some of the findings raise questions over the credibility of claims made by the government.
There is a group of 292 Pakistan Customs Tariff (PCT) codes, which include food and agriculture, chemicals, textiles and machinery, where CD has been slashed from 16% to 15% and ACD from 4% to 2%. This may be considered a 50% reduction in ACD, however, the effective change will not be huge on these items because of the overall tariff structure.
Another group of products including food and agriculture, chemicals, textiles and machinery, comprising 2,225 HS codes, with higher level of CD at 20%, saw no change, though ACD has been reduced from 6% to 4%.
There are 468 items under the highly protected category attracting 30% to 100% CD, including food and agriculture, chemicals, electrical equipment, machinery, iron and steel, base materials, rubber, glass and glassware, and vehicles, which saw no change in CD and a marginal reduction in ACD from 7% to 6%. This suggests that the impact on the level of import will be insignificant.
There is apparently more significant reduction in RD, which is applied to around 2,000 HS codes. In the group including chemicals, wood and articles, textiles and clothing, machinery and equipment, the new tariff policy announced a reduction in RD from 5% to 2.5%. The changes in RD will take effect in four to five years.
Highly protected sectors like agriculture, chemicals, and mineral products witnessed a 50% reduction in RD (from 10% to 5%), with plastics seeing a drop from 15% to 7.5%, suggesting broader relief in many intermediate and essential goods.
Auto sector, with all its parts, continues to be protected with higher slabs of 35% to 100%, until the current auto policy expires in 2026.
On a positive note, the Fifth Schedule, which includes exemptions, will be changed. A total of 479 tariff entries with the same or lower CD rates in the First Schedule will be deleted from the Fifth Schedule. These entries fall under Part-I (Machinery), Part-III (Poultry & other goods), and Part-VII (miscellaneous goods). Part-VII (miscellaneous goods) will be omitted, and two entries from Part-VII will be shifted to Part-III (Poultry & other goods). There should not be any exemptions in CD. Where needed, 0% slab can be used.
In conclusion, the National Tariff Policy (2025-30) aims to create a more transparent, predictable, and competitive tariff regime. This is possibly the most important tool for improving Pakistan's economic growth prospects in the short to medium term, while long-term structural changes in the economy will take more time.
Overall direction is correct. The debate, however, is on the strategy and whether we are doing sufficient liberalisation? My short answer is in negative. The government has followed a gradual, incremental, and phase-wise approach, fearing backlash from powerful industrial groups as well as revenue loss.
There is very little resistance or reaction shown by these powerful groups. This may signal that they have already calibrated their business projections accordingly without any major changes – for now. It is possible that policymakers may have also weighed in the global trade policy environment, where Trump tariffs – and associated negotiations – are driving major changes, thus diluting significant changes in the domestic trade policy.
The writer is the founder and executive director of Policy Research Institute of Market Economy
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Business Recorder
19 hours ago
- Business Recorder
Rs300bn ‘windfall': NA panel seeks sugar mill directors' names
ISLAMABAD: A National Assembly panel headed by PTI stalwart Atif Khan on Monday sought the names of sugar mill directors holding at least 20 percent shares from the Securities and Exchange Commission of Pakistan (SECP), amid reports of Rs 300 billion windfall profits made through price manipulation in connivance with dealers. Officials from the Federal Board of Revenue (FBR) informed the panel that at least 14 FBR officials, allegedly involved in the illegal release of sugar, have been suspended and are currently under investigation. The Additional Secretary of the Ministry of Industries and Production told the committee that millers and dealers manipulated prices following the expiry of the sugar export deadline, earning approximately $440 million from these exports. NA panel to probe Rs300bn sugar windfall He briefed the panel that in the 2024-25 crop year, sugarcane cultivation increased by 1.11% compared to 2023-24. However, due to climate change factors such as heat wave and crop disease, sugarcane yield and sucrose recovery declined. Consequently, sugar production fell to 5.862 million metric tons (MMT), around 1 MMT less than the previous year. Adding carryover stocks of 0.5 MMT, total sugar availability for 2024-25 was estimated at 6.362 MMT, roughly equal to domestic consumption in 2023-24. 'This tight balance between supply and demand led to price increases by the industry from January 2024 onward, following the exports,' he added. The committee, led by the Deputy Prime Minister, held several meetings with key stakeholders including the Pakistan Sugar Mills Association (PSMA), emphasizing price stability. They agreed to cap the ex-mill price at Rs 159/kg and the retail price at Rs 164/kg for one month, until April 19, 2025. 'In May 2025, the committee extended the status quo until June 15, 2025. However, PSMA did not comply and continued to raise prices,' he added. The Ministry of Industries summoned sugar millers, warning them that their actions were unacceptable, but the mills disregarded the ministry's warnings. A track-and-trace system was installed on sugar stocks in November 2021, whereby every sugar sack is stamped with a scanable mark revealing its details, according to FBR officials. However, some sugar bags were released without stamps, allegedly involving officials deputed at the mills. So far, the FBR has seized several trucks carrying unstamped sacks. Sales tax on sugar is deducted at 18% GST rate, amounting to Rs 1,485 per 50 kg sugar bag. Fourteen FBR officials have been suspended, and the Prime Minister has formed a special team including intelligence officials to monitor FBR operations. Sales tax collection from sugar has increased to Rs 100 billion from Rs 65 billion last year, despite a reduction of 1 MMT in sugar production. 'We might not even need to import sugar. The current stock is sufficient until November 15, 2025,' said the Additional Secretary of the Ministry of Industries and Production. It is estimated that only 200,000 tons of sugar may be imported, if any. Notably, 70% of sugar consumption is by industries, not the common man. Officials from the Ministry of National Food Security and Research stated that sugar imports are planned to prevent price hikes and avoid artificial shortages amid concerns about price could rise further in November 2025. After detailed discussions, the panel decided to summon SECP officials to obtain a list of sugar mill directors holding at least 20% shares, which will be shared with the media to reveal any political affiliations. The committee also resolved to review the Public Accounts Committee minutes where the Auditor General of Pakistan claimed sugar millers earned Rs 300 billion in profits within three weeks. Copyright Business Recorder, 2025
Business Recorder
19 hours ago
- Business Recorder
Budgetary outcome in 2024-25
The detailed statistics on the fiscal operations by the federal and the provincial governments have recently been released by the Federal Ministry of Finance. The outcome of the operations has sometimes been referred to as inadequate because of a big shortfall in federal tax revenues collected by the FBR. The agreed target for these revenues was of Rs 12,970 billion in 2024-25, requiring a growth rate of as high as 40 percent. The actual collection was Rs 11,744 billion, implying thereby a big shortfall of Rs 1,226 billion, equivalent to 9.5 percent of the target and 1.1 percent of the GDP. Such a large shortfall has seldom been seen before. However, the distinctly positive side of the outcome is that the budget deficit target of the consolidated operations was more than achieved. It had been set at 5.7 percent of the GDP in the targets of the IMF Programme for 2024-25. The actual outcome is a lower deficit of 5.4 percent of the GDP. Also, the primary surplus at 2.4 percent of the GDP is higher than the targeted level. The contraction in the budget deficit is also sizeable. It was 6.8 percent of the GDP in 2023-24. This implies a big reduction of 1.4 percent of the GDP in only one year. Consequently, along with relatively stability in the value of the rupee, the central government's debt to GDP ratio has remained, more or less, unchanged at close to 66 percent of the GDP in 2024-25. The fundamental question is how, despite a big fall in the FBR revenues, the budget deficit target was more than achieved? The achievement of the targets could only have been possible with higher non-tax revenues and/or lower expenditures. In fact, this has been the outcome in both budgetary heads. The non-tax-to-GDP ratio is higher than the original target by 0.3 percent of the GDP. The overall public expenditure to GDP ratio is lower by 0.5 percent of the GDP. The higher non-tax to GDP ratio is because of somewhat larger revenues than budgeted from the SBP profits and the petroleum levy. The big success is the large containment in debt servicing in relation to the budget estimate for 2024-25. This was set at Rs 9,775 billion. The actual cost of interest payments on debt has been restricted to Rs 8,887 billion, implying thereby a large saving of Rs 888 billion. This alone has covered up 72 percent of the shortfall in FBR revenues. The primary reason is the precipitate decline in interest rates, with the policy rate plummeting from 22 percent to 11 percent during the year. Also, despite the shortfall, FBR revenues have shown an extraordinary increase in the tax-to-GDP ratio from 8.9 percent of the GDP to 10.1 percent of the GDP in one year. The other good news is that faster growth has taken place in direct taxes versus indirect tax revenues. Income tax revenues have risen by almost 28 percent, while the increase in indirect tax revenues was closer to 24 percent. Consequently, the federal tax system is moving in a progressive direction. The focus must now be on further broadening of the direct tax base. There is need, however, to highlight the severe contraction of development spending at the federal level. It has been restricted to Rs 768 billion in 2024-25, equivalent to only 0.7 percent of the GDP. A decade ago, it stood at 1.6 percent of the GDP, and earlier at above at 2.5 percent of the GDP. There are three key sectors of development spending by the federal government. These are water resources, highways, and electricity generation and distribution. They are critical components of infrastructure from the viewpoint of the future growth of the economy. The throw-forward of costs of ongoing projects in these sectors was to Rs 3163 billion in 2024-25, with the actual level of spending of Rs 344 billion. Implementation fully of these projects will take more than nine years at the current rate. Meanwhile, there will be a large escalation in costs. The expenditure on projects in the water resources sector has acquired much greater priority after India's unilateral withdrawal from the Indus Waters Treaty and the risk thereof of diversion of water. The throw-forward cost of ongoing water resources projects in 2024-25 was Rs 1,448 billion, and the allocation to the sector for the year was only 9 percent of this cost. It is worrying that there has been no significant increase in the development allocation to this sector even in the current fiscal year. There is also a need to focus on the performance of provincial governments. There has overall been a shortfall in the generation of a cash surplus by the four provincial governments combined. The target was Rs 1,217 billion in the budget estimates for 2024-25. The actual surplus was Rs 921 billion, implying a shortfall of Rs 296 billion. The basic reason for failure to achieve the target is the big shortfall in federal transfers of over Rs 650 billion and the runaway growth in provincial current expenditure and development expenditure of over 26 percent and 54 percent respectively. Clearly, there is need for stronger expenditure management by the provincial governments to ensure that the cash surplus target is achieved. Also, these governments must adopt a more aggressive stance on resource mobilization. An appropriate indicator of the performance of a provincial government is the growth rate in the cash surplus. It is the highest in Sindh at 106 percent, followed by Khyber Pakhtunkhwa at 71 percent, Punjab at 64 percent and Baluchistan at 1 percent. Turning to the outlook for 2025-26, based on the budgetary outcome and performance in 2024-25, the first critical task is for the federal and provincial governments to target for continued big reduction in the budget deficit. It was reduced by 1.4 percent of the GDP in 2024-25. The target in 2025-26 is to reduce it further by 1.5 percent of the GDP, from 5.4 percent to 3.9 percent of the GDP. This is likely to be a difficult task. FBR revenues will have to increase by over 20 percent in 2025-26, when the nominal GDP is expected to rise by 12 percent. Already, there are indications of a shortfall in FBR revenues in the first month of July 2025. The expectation is also that the growth rate of current expenditure will be only 4 percent in relation to the level in 2024-25. In particular, debt servicing is projected to be actually lower than the level in 2024-25 by almost 8 percent. However, interest rates have remained unchanged by the SBP in the first meeting of the Monetary Policy Committee in 2025-26 and the outlook for interest rates in 2025-26 is unclear at this stage. Overall, there is a need to recognize the achievements in the realm of public finances in 2024-25, while highlighting some of the shortfalls. 2025-26 also promises to be a challenging year. The requirements are for continued high growth in FBR revenues and substantial containment of the increase in current expenditure. Otherwise, the very low budget deficit target of 3.9 percent of the GDP will remain elusive and continue to be the focus of the IMF Programme in 2025-26. Copyright Business Recorder, 2025
Business Recorder
19 hours ago
- Business Recorder
PM hails record business confidence
ISLAMABAD: Prime Minister Shehbaz Sharif on Monday expressed satisfaction over a recent Gallup Pakistan survey indicating a significant rise in business confidence, reaching its highest level in four years. According to the Gallup Business Confidence Index, business sentiment regarding Pakistan's economic direction improved notably, with the index score climbing to -2 in the second quarter of 2025 – the strongest reading since the final quarter of 2021. 'The surge in business confidence is a welcome sign and reflects increasing trust in the country's economic direction,' Sharif said a statement. He credited his administration's economic and institutional reforms for improving transparency and facilitating the business community. Business sentiment witnessing signs of improvement: Gallup Survey The prime minister highlighted a series of government initiatives, including the digitization of the Federal Board of Revenue (FBR), structural reforms in the energy sector, and broader institutional changes aimed at improving the investment climate. 'These reforms have opened new avenues for business and investment,' Sharif said. He added that improvements in macroeconomic indicators and recent upgrades to Pakistan's credit ratings by international financial institutions demonstrate the effectiveness of his administration's policies and a decline in corruption. Sharif also pointed to gains on the Pakistan Stock Exchange, where the benchmark KSE-100 Index recently crossed 147,000 points – an all-time high. He praised Finance Minister Muhammad Aurangzeb and his economic team for their role in stabilizing the economy. He said that the benefits of macroeconomic reforms are beginning to reach ordinary citizens and that efforts to enhance institutional performance will continue. He further stated that the government is expanding consultations with the business community to ensure continued support for enterprise and investment. Copyright Business Recorder, 2025
