Tax track and trace issues

Recent reports suggest the government will operationalise by July 1 a track-and-trace system aimed at addressing sales tax evasion and counterfeiting. The FBR has hired a multinational consortium to set up the system, which would entail electronic monitoring of goods by affixing tax stamps on them at the production stage. This would allow them to be tracked throughout the supply chain and reduce the chances of goods ‘disappearing’ into the black economy. The FBR estimates that about 45 million tonnes of cement, four billion cigarette sticks, four million tonnes of sugar and 30 million tonnes of fertiliser would ‘reappear’ in the tax net if the plan works out. The PM also recently noted that taxes are evaded on about 40% of the cigarettes sold domestically. This alone costs the government billions of rupees.

If the plan works, it could easily be expanded to other sectors. Taking advantage of the increasing digitisation of the economy, it could help rapidly address structural issues that have plagued the economy for decades. Apart from raising government revenue, this could have knock-on benefits for taxpayers. We might actually see tax cuts one day if more tax evaders are brought into the net. Unfortunately, while the plan itself is very much necessary, the implementation has already become unnecessarily controversial. The contract award is currently under a Sindh High Court stay order. The stay was granted because the FBR side-stepped transparency rules and chose a bid that was 52% more expensive than the lowest one. Another allegation in the lawsuit is that the winning bidder has a conflict of interest as it trades in many of the sectors that the government aims to tax. The stay has already delayed the implementation schedule for the project.

The FBR argues that it went with the winning bidder because they had a better technical score, but we will have to wait and see if this argument is accepted by the court. If it isn’t, we will have to conclude that even the solutions chosen to address illegalities in the economy are literally based on illegal policy actions.

Published in The Express Tribune, March 18^th, 2021.

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