Cigarette production: CCP advises to lower criteria for tracking system’s introduction

New system will enhance tax revenue by at least Rs50 billion

Shahbaz Rana March 24, 2018
New system will enhance tax revenue by at least Rs50 billion PHOTO: REUTERS

ISLAMABAD: Amid painstakingly slow progress on the introduction of electronic monitoring system to curb over Rs50 billion annual tax evasions by cigarette manufacturers, the antitrust watchdog has advised the Federal Board of Revenue (FBR) to lower the qualification criteria for creating a level playing field.

In a policy note to the FBR, the Competition Commission of Pakistan (CCP) has asked tax authorities to review the request for proposal document that it issued to hire firms for installing a new trace and tracking system at cigarette production plants. The CCP believes that the FBR’s stringent criteria favour only one global party.

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“A particular security printing firm having implemented the major track and trace systems in California, Turkey, Brazil, Kenya, Morocco, Albania and Georgia appears to be the only firm that meets the experience criteria mentioned,” according to the CCP note.

If FBR implements CCP’s recommendations, this will further delay introduction of the new system that remains pending for one year. The sources in the FBR said that some of CCP’s recommendations can be seriously considered, particularly on the annual turnover of the bidder.

The vested interests in FBR have been delaying introduction of the new system, which once implemented, will enhance the government’s tax revenues by at least Rs50 billion. The decision to introduce electronic monitoring of tobacco products through the stamp, track and trace system at manufacturing and supply-chain stages had been unanimously taken by the top FBR brass in March last year.

In May last year, the FBR had invited bids for the electronic monitoring of tobacco products. The bids were for supply, installation and operation of a system for five years. In response to FBR’s RFP, leading solution providers from Europe, the US and Australia offered their services. These were De La Rue - the UK, SICPA SA - Switzerland, Authentix - the UK, SURYS - Germany, Ashton Potter - USA, Opsec Security - USA and YPB Systems - Australia.

However, firms like De La Rue would not be eligible under the earlier announced requirements.

The FBR wanted to introduce a machine-readable tax stamp with unique features for tracking and tracing production. This system is in line with the World Health Organization’s protocol on tobacco control that is aimed at curbing tax evasion. The system will be capable of capturing real production data of tobacco products, which will stop companies from underreporting their production.

Cigarettes alone constitute approximately 48% of the total federal excise duty collection, making it the single highest contributor.

The CCP is mandated under the Competition Act, 2010 to ensure free and fair competition in all spheres of commercial and economic activities.

The commission’s concern with respect to profile of bidders pertains to high turnover, high capacity, high volume and evaluation criteria that awards maximum points based on projects implemented in number of countries and volume of stamp production and capacity.

The CCP has objected to a condition of $100 million consolidated yearly revenues of the bidder. The sources in the FBR said that this condition could be lowered to $50 million. The commission is of the opinion that annual turnover requirement of $100 million restricts competition, since only a few companies would meet the criteria.

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Moreover, the FBR’s rationale for the requirement of production capacity of 10 billion stamps excludes majority of firms from the tender because globally only one firm meets the criteria based on the volume of business it has and the requirement is in an excess of the total expected demand.

The CCP said that since both turnover and capacity criteria are mandatory, it is of the view that the turnover and capacity requirements would potentially result in only one firm qualifying in the technical evaluation stage. As a result, the bid quoted by it would likely be on the higher side as it would face no competition in second stage of the financial proposal.

It is important to ensure that the winning party has solid credentials, capabilities and references, however, the criteria should not be designed in such a way as to narrow down competition, advised the CCP.

Published in The Express Tribune, March 24th, 2018.

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