Tariffs and consumer welfare

The National Board of Revenue (NBR) abruptly raised import duties on sugar on 6 April 2014. Currently import duties on sugar are in the form of specific duties and advance trade VAT. NBR has now imposed regulatory duties equivalent to about Tk. 500 per ton on raw sugar and Tk1500 per ton on refined sugar. The reason given for the sudden increase in duties is the hackneyed one – protection of domestic industry!

NBR frequently resorts to the domestic industry protection argument when it raises tariffs and other import duties. Whether such action actually sustains the beneficiary industries is a moot point. The NBR has not produced any analytical study to prove its case. Some economists believe that such import taxes have a perverse effect of maintaining, or even raising, the inefficiency of the protected industries.

As a government organisation, one would presume that protection of the interest of the ordinary consumers, which comprise the entire population, must also be a serious concern of NBR. How do the benefits accruing to the industry due to the import duties weigh against the losses suffered by the consumers? NBR seldom addresses this question.

Sugar is predominately an imported good. Very little sugar is produced (from sugar cane) by domestic industries, which are owned by the state. Most of the sugar is imported in the raw form. It is refined to produce refined sugar that is actually consumed by the people. The refiners are all private industries. The quantity of refined sugar imported into the country is very small.

One may wonder if only a small quantity of refined sugar was imported at the old duties why was it necessary to impose such a large increase in the duty on refined sugar to protect domestic sugar industry?

The domestic market price of an imported good in a small open economy (Bangladesh fits this description) is determined by the total import cost inclusive of duties and transaction costs. Hence if the import duty is raised by Tk1.50/kg, the market price will eventually rise by Tk1.50/kg. It should be noted that what is sold in the market is refined sugar, and not raw sugar. The Tk1500 duty hike will raise the market price of refined sugar by Tk1500 per ton or 1.50/kg. The level of duty on raw sugar does not have any impact on the market price as long as business people are free to import any quantity of refined sugar. The duty on raw sugar only determines the profit margin. Hence the unambiguous impact of the rise in duty on refined sugar is an increase of the domestic price by an equivalent amount. Since costs have not changed this imposition amounts to an increase in the profits of refiners as also of state owned firms producing sugar from sugar cane.

An NBR official has commented that the small increase in the price of sugar will not have much effect on consumer welfare. He probably had the per kilogram price rise and the small quantity of sugar a person consumes in mind when he made the comment. However, the aggregate consumer welfare loss due to this small increase in price is very substantial. If the total amount of sugar sold in the country is one million tons, then the price hike due to the imposition of the duty transfers Tk150 crore from the ordinary consumers to the very rich sugar manufacturers and the government. It is not only sugar but umpteen other goods in the consumers purchase basket that have import duties imposed on them. When the duties on all these are lumped together, a very substantial fraction of the income of the consumers is transferred from them to the manufacturers and the government through such indirect taxation.

NBR indicated that it was constrained to raise the duties to help manufacturers 'cut losses due to fall in sales'. If business people fail to read market trends, they suffer losses or reduction in profits. This is how the market forces weed out inefficient producers and correct imbalances in the market. It is improper of the NBR to engineer a unilateral transfer of money from the consumers to the manufacturers to help the latter to cut losses or raise profits.

A less improper measure could have been a cut in the existing duties on raw sugar or subsidise the manufacturers, in which case the burden of raising profits or cutting losses of the manufacturers would have been borne by the government exchequer. Instead the government passed on the burden unfairly to the consumers.

Such unwarranted act on part of the government (perhaps in connivance with the manufacturers) could have been prevented if there were vocal consumer groups or associations. A competent consumer association would have informed the public of the implications of the government action and mobilised public opinion against such impositions. Unfortunately we do not have many strong consumer associations or civil society groups specialising in consumer issues. Those which exist are neither well resourced nor do they have the capacity to mount a serious challenge on behalf of the public against such unfair practices. Their absence and the general ignorance about consumer rights and issues allow the government and the manufacturers to impose large costs on the consumers by raising duties in order to increase their revenues or cut losses. The consumers will continue to suffer unless they learn to collectively resist such impositions.

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M. A. Taslim is Professor and Chairman of the Department of Economics, University of Dhaka.