Cigarette manufacturers fight against tax evasion

Industry provides example of a sector marred by regulator’s failures

IKRAM HOTI May 15, 2017

ISLAMABAD: An alarming trend is coming into view as budget-makers invite the taxpayers’ proposals for incorporation into the upcoming budget.

The trend referred to here is of evading duties and taxes with the help of policymakers and the bureaucracy which supervises production at factories.

This trend, which discourages tax-compliant industries, has been a source of immitigable contention between honest taxpayers and the government machinery that acts neither to correct the policy nor its execution in the affected sectors.

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The most vocal sector in this context has been the cigarette manufacturers who seek emergency correctives in policy and execution to promote the overall culture of tax compliance.

Their plea against the evasion of the Federal Excise Duty by local producers who manufacture and market illicit cigarettes is over three-decades old.

In the meantime, other sectors with similar complaints have been fighting their respective cases with vigour but not as creatively as the cigarette manufacturers. In the upcoming budget-making exercise, they reportedly begged for measures that should discourage tax and duty evasion by some significant degree.

Measure to adopt

In this connection, as government officials point out, one plausible proposal is devising a duty stamp with features that cannot be defied but can effectively help to screen out cigarette packs that are not duly stamped which is proof of duty-payment before ex-factory movement of the produce.

On the other hand, there is also a proposition that the electronic trace-and-track system (ETTS) be put in place for tapping the actual volume of production and distribution of illicit cigarettes. This is a mechanism which can be more effective, as the Tax Reform Committee has been suggesting, but it needs an apparatus the funding and the installation of which involves budgeting of higher scales. According to the last annual tax-payment figures, this industry deposited Rs100 billion with the government coffers, and the compliant manufacturers say that this amount could be Rs145 billion if 43% of the illicit production had been prevented.

At present, illicit producers are able to sell the 20-cigarette pack at prices as low as Rs15-20, whereas the tax-compliant units cannot sell at prices below Rs70-80 per pack. If the low-priced tax-evading brands are allowed to continue flooding the market, major investments in the sector would be rendered impracticable and the units that operate by complying would face shutdown.

FBR’s expectation

During the ongoing fiscal year, the Federal Board of Revenue (FBR) anticipates increase of Rs115 billion in tax collection from this industry, but there is little optimism in this regard as no functional policy and execution has been in operation.

There are internal estimates in the FBR that if the compliant portion of the industry is allowed to function unfettered, Pakistan might extract taxes to the tune of Rs200 billion annually from a sector that is able to sell 88 billion sticks a year. That would be ensured only by screening out the evading portion of the industry and by focusing on the remaining portion which is ready to concede policy-execution to the optimum.

Their example would be that of a role-model in Pakistan and would trigger an era of tax-compliance and investment culture.

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Nevertheless, the relevant government officials maintain an intriguing mum over the fact that numerous brands of cigarettes sell below Rs25, which is economically impossible. They intermittently admit to the fact that this phenomenon could not be without abetment by tax authorities in the field and those monitoring them at the FBR.

The writer has worked with major newspapers and specialises in the analysis of public finance and geo-economics of terrorism

Published in The Express Tribune, May 15th, 2017.

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Ayesha | 4 years ago | Reply Can someone draw up a list of sectors that evade the most. There should be more than 100
Hassan Ali Khan | 4 years ago | Reply Tax Reform Commission is very right in recommending a track and trace system for monitoring production and sale of tobacco products. Such a system will massively reduce evasion if not completely eliminate it. The evasion of taxes/duties on cigarettes is estimated conservatively at over Rs 35 Billion a year. The main issue is tobacco industry is very powerful and buys influence.
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