Pakistan’s favourite beverage: Smuggler’s paradise

Individual taxes and levies multiply import costs, provide incentive for smuggling. Importers save Rs120,000 per ton.

KARACHI:

Tea is by far the most popular beverage in Pakistan. However, unlike India, it is taxed at a very high rate which has made it a lucrative avenue for both smugglers and tax evaders alike. According to industry sources, the only answer is to reduce taxation so there is less incentive to smuggle, and more to pay taxes.

Problems

Government does not feel the pinch as its revenue from a declining official import tonnage is made up the sharp increase in commodity cost and devaluation of the Rupee. Landed cost before duty has more than doubled in last five years.

Time was lost in trying to place limits on what can be imported for Afghanistan through Pakistan under the transit treaty. This hope fizzled out as international conventions do not permit limits. Even if limits were possible, smuggling would continue through the Iran, Afghanistan route, bypassing the Karachi port.

Smuggling did not subside when the government previously reduced the import duty so why try again? This view ignores the fact that sales tax rate was since revised upwards and even with the lower duty rate, the incentive to evade stands at nearly Rs. 120,000 per ton today!

FBR operates in a silo manner.  Member Customs does not wish to see reduction in import duty. Member Inland Revenue wants to preserve sales tax proceeds. No one takes an aggregate view. Solution to stem smuggling requires total levies to decline.

Both the revenue sections of FBR shift the onus to the Intelligence Division, asking for more stringent physical controls. This ignores the high incentive to evade taxes which are utilized by smugglers to buy their way out. Also long porous and law-less borders.

The consumer is not a stakeholder who has any voice at FBR.

There is a debate over how many tons are consumed and smuggled. FBR underestimates both. However it admits that 40,000 tons are smuggled.

Published in The Express Tribune, September 3^rd, 2011.