Move aims to open market to global competition; concerns over impact on economy and trade balance
ISLAMABAD: The federal government has decided to implement significant import tax cuts worth Rs120 billion in the upcoming budget, marking a major shift toward liberalizing Pakistan’s economy. The move is intended to enhance competitiveness by reducing tariffs, though concerns remain about the potential negative impact on the manufacturing sector and the country’s balance of payments.
Prime Minister Shehbaz Sharif has approved the tariff reduction plan this week, overriding objections from the Ministry of Industries and the Ministry of Commerce, according to cabinet sources. These ministries had warned of risks to local industry and the external account posed by sudden liberalization.
Ironically, the Ministry of Finance and the Federal Board of Revenue (FBR)—previous advocates for raising import duties to boost revenue—are now backing the plan. The policy will be rolled out over five years, beginning with the 2025 fiscal budget.
Tariff Structure Overhaul
The revised plan will streamline the existing five-tier customs duty system into four slabs: 0%, 5%, 10%, and 15%, with the top rate gradually lowered from the current 20%. The commerce ministry’s counter-proposal to expand the slabs to six was rejected by the prime minister.
A committee member revealed that the approved strategy is even more aggressive than what Pakistan agreed upon with the International Monetary Fund (IMF). The total estimated revenue loss from the plan stands at Rs512 billion, not including potential changes to the tax structure for the oil and gas sector.
Changes in the First Year
In the first year alone, the plan is expected to result in a revenue shortfall of around Rs120 billion, mainly due to slab restructuring:
- The 3% duty slab, covering 972 items, will be eliminated. Most of these tariff lines will be shifted to the 5% slab, which may generate Rs70 billion in compensatory revenue.
- A new 5% duty tier will be introduced.
- The 11% slab, currently applied to 1,121 goods, will be cut to 10%.
- The 16% slab (545 items) will be trimmed to 15%.
- The 20% top slab, which applies to 2,227 imported goods, will be phased out over time.
Currently, many items under lower slabs also carry additional customs and regulatory duties—up to 60% in some cases. These add-ons are also set to be eliminated: additional customs duties over four years and regulatory duties over five.
Other Key Measures
- The Fifth Schedule of the Customs Act, which governs duty exemptions for capital goods and industrial raw materials, will be gradually abolished within five years.
- The trade-weighted average tariff is projected to decrease from 10.62% to 9.57% next fiscal year.
- The average customs duty will drop from 5.68% to 5.54%.
Concerns Over Economic Impact
Despite the push for liberalization, officials in the commerce ministry caution that the changes may not substantially reduce production costs due to persistent structural challenges—such as high energy prices, labor inefficiencies, and low productivity.
Additionally, the finance ministry has warned that each 1% cut in tariffs could increase the trade deficit by approximately 1.7%. Out of the projected Rs512 billion in revenue losses, nearly Rs300 billion will materialize during the current three-year IMF program, raising further concerns about macroeconomic stability.
Some government advisors have urged a more cautious approach. However, the PM Office believes high import tariffs are stifling productivity and discouraging exports. Reducing duties on intermediate goods and capital equipment is seen as crucial for driving export growth and revitalizing domestic industries.
The plan will not impact import duties on automobiles in the upcoming budget.
