- Making progress
Most economies of the world depend on receiving taxes by citizens and industries to develop systems of revenue and establishing a sound infrastructure and base for development. Pakistan has suffered enormously in the past decades because its system of levying as well as collecting taxes is weak. In the current milieu, with expected tax contribution close to Rs100 billion in the outgoing fiscal year, the tobacco industry has proposed to the government to stick to the policy of third tier slab system for taxation purposes in the upcoming budget for 2018-19.
There is a definite method in the madness because it has been adjudged that the overall tobacco industry has remained stable at 80 billion sticks, with very minimal decline in the last five years. The 2017 average illicit market share was 38.2pc and legitimate share was at 61.8pc. In this environment, government revenue contribution from legitimate industry is 98pc and from the duty not paid sector is 2pc.
It needs to be taken cognizance of that if no third tier would have been introduced then the illicit share would have gone to as high as 50pc. The legitimate industry fell from 66.3 billion sticks in 2012/13 to 29.2 billion sticks in 2016/17 – a volume shift of 37 billion sticks to the illicit sector. After the introduction of third tier the price differential between non-duty paid brands and legit brands reduced from Rs44 to half, Rs22. This price differential had been increasing year on year due to excessive excise led price increases by the legitimate industry.
The FBR should be appreciated for unprecedented crackdown against illicit trade in cigarettes. The government should continue to develop and implement strategies to combat illegal cigarette trade in Pakistan
It is heartening to note that there has been an addition of about 20pc+ in government revenues due to the third tier taxation. Government revenue had reduced from Rs111 billion (2015/16) to Rs74 billion in 2016/17 (a shortfall of Rs37 billion) and was set to dip even further, however, with the introduction of third tier and effective enforcement of this tier, government revenue is expected to increase to more than Rs90 billion. This increase in revenue is corroborated by a decline in illicit post the fiscal and enforcement measures.
Some prominent measures adopted include the creation of a dedicated task force by the name of Inland Revenue Enforcement Network which led to a whopping confiscation of 1.6 billion cigarettes and raw material seized through multiple raids in 2017. The FBR simultaneously also launched a nationwide awareness campaign.
Illicit trade market share went as high as 41.2pc in June 2017. Post the third tier and its effective across the board enforcement, illicit share started declining, however, since the last four months this decline has been stabilising and now the illicit market share stands at 35pc. This is because the duty not paid sector is coming up with innovative ways to create hindrances in enforcement of the third tier: Illicit players have started shifting their manufacturing hubs from Khyber Pakhtunkhwa (KPK) Province into Azad Jammu and Kashmir (AJ&K) and have their warehousing facilities apparently in private residences.
They have also started reducing the prices of their already extremely low-priced brands. Before the brands were selling at Rs25 to Rs30, they are now selling at even lower prices.
Illicit players are not only involved in fiscal evasion but in various other forms of regulatory evasion as well. Where the law prohibits any cash prizes or discounts to consumers, these illegal manufacturers are openly giving discounts, cash prizes, rebates and gifts to consumers. Hajj and Umrah tickets near Eid, bicycles cars and motor cycles are being gifted under these schemes while more than18 brands have been launched in the last 3 months alone.
Illicit trade has struck back with a vengeance. The recent introduction of legislation by the FBR that levied five percent adjustable advance tax on the purchase value of tobacco from manufacturers of cigarettes has also been strongly opposed by illicit manufacturers who used farmers and dealers of tobacco as the front. This advance tax is adjustable and not additional and is already being collected from the legitimate players. The measure has been introduced to monitor and curtail the manufacture and sale of non-duty paid cigarettes which is why the illicit manufacturers have taken a strong opposition to it.
The Illicit players also went to the Lahore High Court whereby petitions filed were taking the plea that the IREN FBR is not competent to intercept or check cigarettes manufactured in the AJK and the esteemed court dismissed the petition of cigarette manufacturers and distributors of Azad Jammu and Kashmir (AJK) including Walton Tobacco, Nobel Tobacco and Watan Tobacco. LHC stated that the Pakistani tax authorities have the legal power to check, inspect and monitor the trade of cigarettes within Pakistan and if any movement is against the law, they can seize the non-duty paid cigarettes allowing Pakistani tax authorities to effectively check the cigarettes manufactured in AJK and brought into the territorial jurisdiction of Pakistan.
The illicit sector continues to be the biggest threat to the legitimate industry and government of Pakistan. According to the World Health Organisation (WHO):
Nearly 10 pc of the global cigarette trade is illicit; significantly higher in low- and middle-income countries, up to 50pc and more. If illicit trade were eliminated, governments worldwide could gain at least $30 billion/year in tax revenue.
WHO has warned that there will be dire consequences of illicit trade. These include increased accessibility, affordability and consumption of tobacco products in the realm of public health. In the head of linkages with organised crime, profits accrued from illicit trade will fund other criminal activities. There will be considerable losses in government revenue (taxes).
Therefore, in Pakistan, in view of the unique market dynamics and operating environment it is essential to continue with the existing structure, to adopt an even more aggressive approach of enforcement of all applicable laws against the illicit manufacturers of cigarettes.
To achieve its tax collection target and control proliferation of non-tax paid cigarettes, the government should focus on continuity of policy measures and ensure their effectiveness by monitoring compliance of the minimum pack price as stipulated by law, they added.
The FBR should be appreciated for unprecedented crackdown against illicit trade in cigarettes. The government should continue to develop and implement strategies to combat illegal cigarette trade in Pakistan. In 2017, the IREN seized approximately 1.63 billion non-duty paid cigarette sticks and raw material of illicit sector.
The FBR’s field formations, including Intelligence and Investigation-Inland Revenue (I&I-IR) and Regional Tax Offices (RTOs) are operating in liaison with IREN against the illicit tobacco manufacturers, suppliers and traders in Karachi, Lahore, Islamabad, Rawalpindi, Quetta, Peshawar, Faisalabad, Hyderabad, Sahiwal, Attock, Muzaffarabad, Mirpur and other major cities of Pakistan and Azad Jammu and Kashmir (AJK) that were regarded as hubs of illicit tobacco.