Curtailment: Flow of smuggled tea going unchecked

No major breakthrough, though customs claims to have seized big consignments.

ISLAMABAD:

Measures aimed at stemming the flow of smuggled tea seem not to be on top of the Federal Board of Revenue’s (FBR) agenda, as the market size and revenues generated from it do not provide a big incentive to taxmen to go after the smugglers.

The revenues collected through 17% general sales tax and 10% customs duty on tea, were not even half a percentage point of total taxes collected by the FBR in the last fiscal year 2012-13. The size of the smuggled market is in the range of 40-50% of the total tea consumption, according to unverified claims.

The value of tea imports ranges between Rs35 billion and Rs40 billion, a small market, though Pakistan is counted among top five tea consumers in the world. Tax collection amounts to roughly one-fourth of total tea imports.

The size of the smuggled market was anybody’s guess as there were no authentic figures, said Muhammad Riaz, Director General of Intelligence and Investigation, Customs. But he said they were regularly conducting raids and capturing big consignments of smuggled tea.



Millions of kilogrammes of tea find their way into Pakistan every year from Afghanistan under the Afghanistan-Pakistan Transit Trade facility. This high-quality black tea first goes into Afghan markets and is then smuggled back to Pakistan.

According to Pakistan Tea Association, 240,000 tons of tea was consumed last year, more than half of which was smuggled into the country under the garb of transit trade.

Even if the FBR succeeds in taxing the entire consumption, the contribution of taxes from tea will not be one percentage point of total revenue collection.

Imports, taxes

In fiscal year 2012-13, the FBR collected Rs7.9 billion in taxes, which were just 0.4% of the total revenue collection of Rs1.936 trillion that year. The numbers were not impressive. Of the taxes, Rs3.73 billion was customs duty and Rs4.2 billion sales tax. The share of customs duty on tea was 1.5% of total duties while the share of sales tax was hardly one percentage point of total collection.

In the year, tax collection on tea was 14% less than the previous year, mainly because of the previous government’s decision to cut sales tax to 5% from 16%. Pakistan Tea Association had attributed the increasing smuggling to the higher rate of taxes.

“The cut in sales tax neither translated into a reduction in consumer price nor helped increase tax revenues,” said Nisar Muhammad, Member Customs.

Due to the dismal outcome, the government again increased sales tax to 16% in March last year, which was further increased to 17% after the PML-N government announced the budget in June that year.

In 2011-12, tea imports stood at Rs36.7 billion, generating taxes of Rs9.2 billion. The amount was only half a percentage point of total tax collection. The FBR raised Rs5.65 billion in sales tax, which was 1.3% of total sales tax collection. Customs duty was Rs3.73 billion or 1.1% of total duties.

In 2010-11, the value of tea imports was Rs36.2 billion and the revenues generated were Rs9.4 billion. Sales tax collection was Rs5.9 billion or 1.9% of total collection while customs duty collection remained at Rs3.5 billion or 1.4% of total duties.

In 2009-10, the value of tea imports was Rs27.8 billion and tax collection totalled Rs7.3 billion. Sales tax stood at Rs4.53 billion or 1.5% of total sales tax and customs duty collection was Rs2.8 billion or 1.8% of the total.

In 2008-09, tea imports were assessed at Rs20.8 billion and revenues were Rs5.8 billion. Sales tax collection stood at Rs3.6 billion while revenue on account of customs duty amounted to Rs2.2 billion.

In the current fiscal year, the trend is also not encouraging. The FBR has reported about 25% increase in sales tax collection in the first half of the year despite a three-time increase in the tax rate to 17%.

The number shows indifference of the FBR and its inability to collect taxes even from registered importers. Its enforcement teeth seem to be not working.

Tea imports during July-November (2013-14) were recorded at $108.476 million against imports of $147.726 million in July-November (2012-13), according to Pakistan Bureau of Statistics. In the period, 46,799 tons of tea was imported against imports of 49,242 tons in the corresponding period last year.

Published in The Express Tribune, February 24^th, 2014.

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