VI. TRADE REGULATIONS AND STANDARDS A. Tariff and Import Taxes Tariffs: Pakistan uses the Harmonized System to classify and describe goods. Customs duties are levied on ad valorem basis. The GOP continues to rationalize its custom tariff. Since Pakistan fiscal year 1987-88, tariffs have been reduced from a range of 50-225 percent to 10-70 percent. The maximum all-inclusive tariff rate is now 70 percent. Import Taxes: The importers are required to pay an import fee at a rate of 6.0 percent ad valorem at the time of applying for a letter of credit. In addition to the customs duty, the government collects a 5 percent education tax (iqra) on all imports, plus a 1.0 percent flood relief surcharge on the c & f value of all imports. The government also levies a sales tax of 15 percent on the duty-paid value of a wide variety of goods produced in or imported into Pakistan. Customs duty and other charges are payable in Pakistani currency. B. Customs Valuation Valuation - Customs valuation is done every quarter by a customs valuation committee. The committee consists of controller valuation (customs), representatives from various trade and importers associations, chambers of commerce and industry. The committee reviews the difference in the rate of import of goods from the import documentation (evidential invoices) of physical import during the previous quarter. It is empowered to fix the Import Trade Price (ITP) of the imported and exported goods. Based on the committee's review and decision, a fresh ITP is issued quarterly. Customs Clearance and Warehousing - Ample public and bonded warehouse facilities, most of which are owned by the port trust organizations, exist for the storage of goods. Pakistan has no free-port facilities, but regulations permit similar privileges while goods are warehoused. Goods must be landed within the period specified on the bill of lading or within 15 days after entry of the vessel into port. Once the goods have entered and duties have been assessed, the importer must clear them for consumption (by paying the duties) or warehouse them. C. Import Licenses All importing firms in the private sector must register as importers with the Government of Pakistan's Export Promotion Bureau and must have valid registration at the time of importing. The GOP permits imports from all countries except Israel or goods originating in Israel. However, in the case of loans or credits, US PL-480, barters or trade agreements, imports shall be made subject to availability from the specified source only. Imports are extended for a further maximum period of 24 months on payment of an additional fee of 0.25 percent of un-utilized value of letter of credit for each period of six months. However, in the case of machinery, the letter of credit may be extended for 36 months on additional payment of 0.25 percent of the unutilized value for each period of six months. Importers must also: - Obtain special authorization of the Ministry of Commerce for importing items from the "negative" list; - Ensure that correct Harmonized Schedule code number of every imported item is mentioned in the import documents; - Obtain prior approval from the relevant GOP ministry for the import of animals, plants, pesticides, arms, munitions, explosives, revolvers and pistols, radio-active elements, calcium carbide, steam and vapor generating boilers, petroleum and products, pharmaceutical raw materials, drugs and medicines, security papers and maps, etc.; - Ensure that the supplier of cigarettes and cigars prints warning "Smoking is injurious to health" in both Urdu and English on every packet. Imports from India are a special case. Only items on a list issued by the Ministry of Commerce may be imported; effective with the annual trade policy issued in July 1993, that list included over 500 individual items, classified by Harmonized System numbers. Pakistan's imports from India in 1992-93 totaled $67.2 million and have registered steady annual increases from the $31.8 million imported in 1988-89. D. Export Controls Export of goods from Pakistan is allowed generally. However, export of some items is banned/restricted or is subject to certain conditionalities for reasons of short supply and to ensure their availability in the home market. (E.g., export of live animals and meat shall be in accordance with the procedure notified by the Export Promotion Bureau from time to time.) Other items banned/restricted for export purpose include: arms, edible oils, hides and skins, timber, milk and milk products, and antiques. Export of unaccompanied personal baggage excluding carpets is permissible without authorization by any government agency. The customs authorities will, however, inspect outbound baggage to ensure that no banned/restricted item is taken out of the country as accompanied personal baggage. E. Import/Export Documentation The following documents are required for imports and exports: bills of lading; invoices; packing lists; certificates of origin; copies of letters of credit; an import or export license; and insurance certificates. F. Temporary Entry GOP import regulations permit temporary import of legally importable items by foreign companies (e.g. as commercial samples) provided that a bank guarantee or indemnity bond equivalent to the value of the item is provided to the Customs authorities to ensure that the items will be re-exported. Applicable import fees must be paid, but will be refunded on re-export. Similarly, domestic industrial firms may import items for test, trial, and re- export, subject only to the payment of a refundable import fee. G. Labeling, Marking Requirements Pakistan has no uniform or universal system of imposing labeling and marking requirements on products. However, individual industries or sectors are subject to the regulations of specific bodies. For example, the Ministry of Health sets requirements for the pharmaceutical industry. H. Prohibited Imports Pakistan controls certain imports through the negative list. Goods not on the negative list may be freely imported. The negative list is made up of (a) items banned for religious, security or luxury consumption reasons; (b) capital and consumer goods banned to protect domestic industry; and (c) intermediate goods used in producing protected goods. The restricted list includes items that may be imported only, for example, by certain parties (the government or other specified users) or by certain special arrangements (such as credit or barter trade). Major items on the negative list are listed above in the Section III. E. ("Trade and Investment Barriers"). I. Standards The Pakistan Standards Institution (PSI) is the national standards body. The various activities of PSI include preparation and implementation of standards, introduction of standards inspections systems, collaboration with international organizations such as the International Standards Organization (ISO), and dissemination of information on standardization and quality control. PSI has so far established some 3,500 national standards for agriculture and food, chemicals, civil and mechanical engineering, electronics, weights and measures, and textile products. However, only 41 items for the domestic market and 33 items for export have been brought under the compulsory certification scheme. Pakistani companies are yet to adopt ISO 9000 standardization. However, the GOP has recently started free advisory service on international standardization. The Export Promotion Bureau (EPB) highlights the importance of ISO in eye-catching newspaper ads and invite company representatives to seminars and free expert advice on the subject. The advisory service covers planning, documentation, interpretation into local environment, implementation and certification processes for ISO 9000. The GOP plans to introduce ISO 9000 standards in the services sector. J. Free Trade Zones With a view to promoting foreign investment and a greater export surplus for the country, the GOP established a free trade zone at Karachi in 1980. The Karachi Export Processing Zone (KEPZ) Authority has so far sanctioned over 140 industrial units with foreign equity. However, only 50 units are in production and the rest are at different stages of development. The KEPZ has fully- developed infrastructure facilities and offers the following incentives to investors: - Complete exemption from income tax up to the year 2000 and imposition of only 25 percent of applicable tax thereafter; - Salary of foreign personnel is exempted from income tax for five years from the date of arrival in Pakistan; - Import of machinery, spares, and raw materials is free from all federal and provincial taxes; - The right to export from the KEPZ to Pakistan; - No tax on capital gains; - Unrestricted repatriation of capital, profits, and dividends allowed; - Exemption from certain Pakistani labor laws. (However, withdrawal of this exemption is under consideration because of concerns over potential abuses or workers' rights.) In addition to the KEPZ, the GOP has planned Special Industrial Zones (SIZs) at different locations in the country. Of the 12 proposed zones, three each will be in the provinces of Punjab and Sindh, two each in the provinces of NWFP and Baluchistan and one each in the Northern Areas and Azad Kashmir. According to the criteria set for establishing an industry in the SIZ, any SIZ project must export at least 60 percent of its weighted production capacity. Minimum foreign equity in an SIZ unit must be 40 percent. If the foreign equity in a project is 51 percent or more, its export target is only 50 percent of the weighted production capacity. Foreign investors must bring their own foreign exchange for financing foreign currency requirements of their projects. However, local currency financing requirements may be met from local banks. The SIZ package of incentives/concessions includes: - Five-year tax holiday for industries set up to June 30, 1997; - Exemption of customs duty, import fee, iqra surcharge, and sales tax on import of plant and machinery not manufactured locally; - Capital gains to the extent of foreign equity share would be exempted from taxation for a period of 5 years from the inception of the project; - Pakistani labor laws will not be applicable to industries in the SIZ (Also under review because of concerns about potential abuses of workers' rights). K. Membership in Free Trade Arrangements Pakistan is not a member of any free trade arrangement, but is party to two arrangements which are seeking progress toward regional trade liberalization. The Economic Cooperation Organization (ECO), whose founding members are Pakistan, Turkey, and Iran, has reached basic agreement to grant a 10 percent tariff preference on statutory rates for some goods. (ECO membership was expanded to 10 in 1993, when Afghanistan, Azerbaijan, and the five formerly Soviet Muslim republics of central Asia were admitted.) The South Asian Association for Regional Cooperation (SAARC) is comprised of India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldive Islands. Its members have traditionally played a small role in world trade; in 1990, intra-South Asian trade was less than one billion U.S. dollars. SAARC has proposed a South Asian Preferential Trading Agreement (SAPTA), which will be reviewed for ratification in 1995. Because the SAPTA provides for product-by-product negotiation, and because several members have similar production structures and therefore limited complementarities, a SAPTA is not likely to have a large immediate impact on regional trade flows. Pakistan's leading regional trading partner is Bangladesh (its former eastern wing), very closely followed by India. Pakistan's two-way trade with each in 1992-93 totalled about $150 million. Pakistan is also a member (along with Indian and Nepal) of the Asian Clearing Union, which was founded in 1976 and aims at facilitating multilateral payments through the use of currencies of participating countries in regional transactions in order to expand intra-regional trade and save convertible foreign exchange.