Pak Economy: Duty on luxury items paves way for misuse of baggage rules

SOHAIL SARFRAZ

ISLAMABAD (July 09 2008): The imposition of 35 percent customs duty on the import of 300 luxury items in budget (2008-2009) would result in massive misuse of liberal baggage rules/duty-free shops; increase smuggling and mis-declarations on the import of luxury products.

Tax experts told Business Recorder on Tuesday that the Federal Board of Revenue (FBR) has estimated to generate an amount of Rs 2 billion from luxury items during the current fiscal year. The customs duty has been enhanced up to 35 percent to discourage the import of non-essential and luxury items.

However, there are several issues involved in raising customs duty on the import of luxury items. There are apprehensions that some of the luxury items like perfumes, etc would be converted into major smuggling-prone items due to higher rates of customs duty. The importers might use unauthorized routes for bringing luxury items liable to higher rate of customs duty. Another apprehension is the gross miss-declarations on the import of luxury goods to evade higher rates of 35 percent customs duty.

Taxation at the import stage is directly linked with the consumption by the general masses. It has yet to be seen whether the documented imports of luxury goods during the first quarter (July-September) of 2008-09 would increase against the last quarter (April-June) of 2007-08.

This aspect could not be ruled out that the FBR had collected more revenue from these luxury items liable to 20 percent duty as compared to higher slab of 35 percent due to expected decrease in volume of imports of such items. However, volumes of imports in coming months would clearly specify the revenue implications of this budgetary decision.

Sources said the FBR has enhanced duty on the import of non-essential items, but the liberal baggage rules were not being tightened in last budget.

There is a strong possibility that the people would start misusing the baggage schemes for bringing large quantity of such items through accompanied baggage, etc. Luxury goods would not be brought in commercial quantity under baggage rules to avoid penalty, but accompanied baggage may contain un-declared luxury goods.

Secondly, the allowances available to the incoming international passengers under the baggage rules may be misused. The agents can purchase the baggage allowance of incoming passengers for making purchases of luxury items from the duty-free shops. The people would use different methods to raise their allowances under the baggage schemes for subsequent misuse at the duty-free shops.

They said that duty-paid value has been considerably increased due to imposition of 35 percent duty on luxury items. Apart from 35 percent duty, 16 percent sales tax is also applicable to the import of such items.

According to an estimate, there would be an impact of 24-26 percent increase in the overall incidence of taxes on the import of luxury items liable to 35 percent customs duty. This would force the importers to adopt other routes for importing luxury items instead of documented legal imports.

Sources said the raised duty on luxury items is not the right tool to collect taxes. The levy of sales tax or value-added tax (VAT) on consumption stage would be more appropriate measure for improving revenue collection from luxury items. The sales tax levy could be increased at the stage of selling luxury items, instead of higher import duties.

Within the customs department, there is a theory that imports would generally decrease after levy of certain higher rate of customs duty. At one stage, the volumes of imports would decrease following optimum level of duty being imposed on the luxury items, experts added.

Contrary to this, the FBR opined that review of country’s imports during the current year shows that a lot of non-essential items are being imported amidst the yawning trade gap putting pressure on the foreign exchange resources.

The phenomenon has significantly contributed to the unprecedented rise in value of imports in the absence of a corresponding increase in exports. Substitutes of all these imported products are locally available. Hence, there is a compelling need to address this widening gap by discouraging the import of non-essential and luxury consumption items.

The FBR has identified these items which were liable to duty @ 15, 20 and 25 percent. These imported items are used by the middle class and upper echelon of the society who have the capacity to pay. Therefore, duty rates on these items have been increased from 15 percent, 20 percent, and 25 percent slabs of import duties to higher slabs of 30 percent and 35 percent, respectively.

Source: Business Recorder, 9/7/2008

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