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Flourishing tobacco industry & “soft state”

Huzaima Bukhari & Dr. Ikramul Haq

Only two [tobacco] companies pay 98 percent of total tax [tobacco collection]. The remaining 40% companies pay meagre 2% tax”—Prime Minister, Imran Khan

“Cigarette manufacturers across the country are evading millions of rupees in taxes through fraudulent methods in connivance with government officials, opposition members, and individuals of investigative agencies”— Investigative report aired by Geo News on Aaj Shahzeb Khanzada Kay Sath

The most effective way to reduce tobacco use is to raise the price of tobacco through tax increases and ensure that the tax increases are reflected in prices. Higher prices discourage youth from initiating cigarette smoking and encourage current smokers to quit”— Tobacco Taxes in Pakistan

“The government has ignored the cabinet’s decision on imposing a health tax on cigarettes in the budget for fiscal year 2019-20 in a bid to generate funds for development of the health sector”—Budget 2019-20: Health tax on cigarettes ignored, The Express Tribune, June 13, 2019

The tobacco ‘track and trace’ regulations are part of the EU Revised Tobacco Products Directive (2014/40/EU). The UK Government are in the process of introducing the ‘track and trace’ provisions of the Directive into UK law. These regulations will come into effect on 20th May 2019”—Track and Trace

“Illicit trade and counterfeiting not only reduce turnover and profit for honest businesses and local producers: they also cause Revenue agencies to lose tax income. Failure to declare imported goods, miss-declaration of their nature or value and under-declaration of local production quantities similarly undermine governments’ ability to invest in social services, infrastructures, schools and public health programmes. Being able to detect fraud and enforce tax regulations is crucial to protect revenue, especially for developing countries which rely heavily on custom duties on imported goods.

We provide sophisticated monitoring and auditing tools allowing governments to tackle illicit trade, offering a secure, field-proven authentication and traceability platform”—message on website of SICPA, a Swiss company specializing in detecting counterfeit, ensuring security, countering tax evasion, alteration and smuggling etc.

According to a Press report, the Federal Board of Revenue (FBR) has awarded a multimillion dollar contract for license of track and trace (T&T) system of tobacco products to National Radio & Telecommunication Corporation (NRTC). On November 6, 2019, International Tax Stamp Association (ITSA), a non-profit organisation established in November 2015 to ensure better understanding of the benefits of tax stamps and tax stamp technology, and to promote high professional standards through education, research and advocacy, and by developing and promoting best practice, alleged that the decision “contravenes the obligations of the World Health Organisation’s Framework Convention on Tobacco Control (WHO FCTC) Protocol, which sets out a clear strategy for the implementation of comprehensive, industry-independent T&T systems for tobacco. It was claimed by ITSA that “the NRTC’s T&T solution is provided by a company (Inexto) that depends on the tobacco industry for almost all of its revenue and that it promotes the use of the industry’s own Codentify technology for T&T, thus there is a clear case of Protocol transgression”. On the other hand, the spokesman of NRTC says that award is strictly as per law.

The Chairman FBR, Syed Muhammad Shabbar Zaidi, however, said that the contract was awarded to the lowest bidder as “we are bound to follow the rules framed by Public Procurement Regulatory Authority (PPRA) for awarding this contract”.

The FBR has till today not contradicted the specific allegations of ITSA. On the contrary, an article published in a local newspaper on November 18, 2019 quoted Hamid Ateeq Sarwar, Member Inland Tax Policy and FBR’s spokesman, saying: “NRTC may not have the experience but it is partner of Inexto, which has vast experience in establishing, maintaining and operating the track-and-trace system in the tobacco sector”. It is an open admission of what ITSA alleged. It confirms that authorities did not follow WHO FCTC Protocol in awarding to NRTC. However Haider Bajwa, a spokesperson for NRTC told a local newspaper in an interview that the contractual agreements and arrangements are in place to guarantee that no other parties including Big Tobacco can influence the design, solution or project.

Mr. Haider said that the NRTC is using the Inexto track-and-trace technology for its solution, which is a 100% independent solution and has no links with the tobacco industry. “There is no ownership of Inexto shares directly or indirectly by any tobacco or tobacco-related companies,” he said and added, “In addition, all checks and information will be available to the FBR control rooms for review and analysis”. “The whole process is designed to comply with the FCTC protocol of the World Health Organization (WHO),” said Haider. “By stopping illicit trade, illegal sale of tobacco will be subsequently controlled.”

Pakistan is a signatory to the WHO FCTC, which it ratified on November 3, 2004 and also acceded to the FCTC Protocol to Eliminate Illicit Trade in Tobacco Products on June 29, 2018. Pakistan is one of 181 countries that signed on to the FCTC since 2004 and is among 56 parties that have ratified the protocol to eliminate illicit trade in tobacco products. The protocol stipulates that any tobacco track and trace solution shall be independent of the tobacco industry. As a signatory to the FCTC, Pakistan was to establish a project to implement a ‘Track and Trace System’ for all tobacco products that are manufactured in, imported into or are transiting through its territory. It is a fact that no regime wanted track and trace in Pakistan to counter revenue losses due to illicit tobacco trade and check tax avoidance by other industries through suppression of sales and that is why it has been starting and stopping for the last 12 years. The Government of Pakistan Tehreek-i-Insaf (PTI) took the initiative and after tender selected NRTC. According to one estimate, Pakistan’s revenue loss from illicit cigarette trade has now increased to more than Rs 50 billion per annum from Rs 27 billion in 2012.

According to Ahmad Ahmadani and Syeda Masooma [Profit, November 18, 2019] “NRTC is owned by the Ministry of Defence Production and manufactures sophisticated military grade communication equipment for the Pakistan Army, and also exports such equipment to a number of countries including Saudi Arabia, Nigeria, Sri Lanka, and Malaysia. After the bidding process, the FBR declared the consortium the winner, and granted a license to the local component of that consortium, the NRTC. The initial contract will last for a period of five years and mandates the company to establish, maintain and operate the entire track-and-trace system for the tobacco sector. This license was issued at a price of Rs731 per 1,000 stamps. In a country that consumed close to 40 billion smuggled cigarette sticks in 2018, that could amount to a substantial amount of revenue for the government as well as the company providing the solution”.

In their write up, Ahmad Ahmadani and Syeda Masooma revealed that the auction attracted interest from leading technology providers in the field, including Swiss security technology firms SICPA and Inexto, the UK-based DeLaRue and OpSec, US-based firms Authentix and SURYS, among others. The quoted Malik Imran, a representative of the Campaign for Tobacco-Free Kids, a non-profit organisation that lobbies against the tobacco industry, that “the award of the license by the FBR lacked transparency”. He said that “the FBR, while granting a license for the establishment and operation of the entire track-and-trace system for tobacco products, has “ignored technical assessments” and has “granted the license to the lowest financial bidder”. “The FBR had amended the rules to facilitate a particular company,” alleged Imran, adding that the FBR compromised the technical capabilities for the track-and-trace license by choosing the lowest financial bidder with no past experience in establishing such systems. He claimed that “Inexto, the cloud-based global tracking system and brand protection solution, which is partnered with NRTC, also has business links with Philip Morris International, the parent company of Philip Morris Pakistan”.

He said that Philip Morris had obtained the track-and-trace services of Inexto for its own surveillance. “NRTC won the bid because of its association with Inexto, which is a front company of the tobacco industry and receives business from the said international company,” Malik Imran said. “FBR should make the technical assessment (weighted average) of the participants public.”

According to Ahmad Ahmadani and Syeda Masooma, “Malik Imran is not alone in making that allegation. In 2018, a study from the Tobacco Control Research Group at the University of Bath, using a range of sources including internal documents and whistleblower testimony, claims the industry is now going to elaborate lengths to control the global track-and-trace system that the United Nations has said must be put in place to counter smuggling, according to a report published in June 2018 in The Guardian, a British newspaper”. The report specifically cited Inexto as being effectively owned by Philip Morris. When Haider Bajwa was questioned by Ahmad Ahmadani and Syeda Masooma about the track-and-trace license being awarded to NRTC, he responded by saying that the corporation along with its consortium partners “has won this project on true merits and experience, and is capable of delivering the expected results within the stipulated time frame given by FBR. He said that the NRTC solution will cost Rs3.5 billion less as compared to the 2nd lowest responsive bidder–NIFT. He said that if the technical and financial score is combined, the NRTC would still score the highest amongst all bidders. This was subsequently confirmed by the FBR as well.

Sources familiar with the tobacco industry in Pakistan, quoted by Ahmad Ahmadani and Syeda Masooma, believe that owing to the nature of business of NRTC, it is perhaps the only local company amongst all 13 applicant consortiums that possesses the needed expertise and required security protocols of military standards. This would ensure that the highly sensitive track-and-trace data would be protected with highest military grade standards and will not be shared with any foreign company, unlike in the case of other competitors.

The report by Ahmadani and Syeda Masooma says as under:

However, at the same time the FBR official Dr Hamid Ateeq confessed to NRTC coming second in technical evaluations. Speaking to Profit, he maintained that technical evaluations were conducted by the FBR committee to assess the participants of the bid and that Reliance Solutions Pvt Ltd scored best in technical evaluation while the license winner (NRTC) stood second. “NRTC may not have the experience but it is a partner of Inexto, which has vast experience in establishing, maintaining and operating the track-and-trace system in the tobacco sector,” he added. If the industry experts are to be believed, the consortium appears to have fairly won the bid. Nonetheless, Inexto’s alleged ties to Philip Morris suggest that the government’s own rules as well as international guidelines were not necessarily followed. It remains unclear as to whether that will have an effect on the efficacy of the system itself, though it does cast some shadow of doubt over the transparency of the process.

According to SICPA—a company owned and managed by the third generation of the Amon family of Switzerland, helping governments, central banks, high-security printers and industry find comprehensive solutions to widespread security issues) they have  never worked for any tobacco company. On the website of SICPA, it is mentioned: “The growth in the illicit trade in tobacco products remains a worrying worldwide phenomenon as it provides an enduring source of funding for organized crime and terrorist activities; these potential threats must be acknowledged and tackled as a national and international priority. The moment your country commits to the FCTC Protocol, our team of scientists and engineers are ready to provide a scalable solution based on modular architecture for tobacco control that is fully compliant with the FCTC Protocol and enables your government to reduce illicit trade and increase tax revenue.

There are many companies in the world that have never worked with tobacco industry and helped governments to implement T&T  systems, but FBR did not impose a rider in the bidding advertisement that only those entities should participate that had never worked or benefitted from tobacco industry, directly or indirectly. The government of PTI, Standing Committees of Senate and National Assembly and watchdogs like Accountant General of Pakistan, National Accountability Bureau (NAB) etc have failed to play their role.

Pakistan singed FCTC in May 2004 and ratified it in the same year. It was thus bound to implement T&T systems to curb illegal cigarette sales, but failed to do so for the last many years proving the allegation that “cigarette manufacturers across the country have been evading millions of rupees in taxes through fraudulent methods in connivance with government officials, opposition members, and individuals of investigative agencies”.  Currently, billions of rupees are lost to tax evasion each year. It is pertinent to mention that the tender and implementation of FCTC was delayed for years and the FBR even missed deadline of International Monetary Fund (IMF) to issue tobacco track and trace licenses by the end of September 2019 as part of deal for the release of US$ 6 billion bailout.

Inexto is a leading provider of software and services for “Brand Protection, Authentication, secure Serialization, Track & Trace and Volume Control”. According to ITSA, “eleven companies participated in the bidding, out of which nine qualified, including NRTC, which was subsequently disqualified for not having used the correct method for expressing its price. But the decision was reversed after the company filed a complaint with the FBR grievance committee, and NRTC (and therefore Inexto) was eventually awarded the contract”. Juan Carlos Yañez Arenas, Chairman of ITSA, said: “This case highlights the heavy influence that the tobacco industry continues to have on certain governments around the world. Inexto derives almost all of its revenues from the industry, so can hardly be said to be operating from a position of independence or neutrality”.

According to a Press report, FBR took the decision to ratify the FCTC Protocol but “in practice does not seem willing to adhere to the principles set out in it, as is being highlighted by ITSA”. Article 8.13 of the WHO Protocol stipulates that revenue authorities should limit their contact with the industry “to the extent strictly necessary”. This clearly has not happened in this case alleges ITSA. It is also in conflict with Article 5.3 of the Protocol, which requires governments to protect tobacco control policies from commercial and other vested interests of the industry.

The FBR, in fact the Government of Pakistan Tehreek-i-Insaf (PTI), must explain why they have not allegedly followed FCTC Protocol guidelines and failed to secure independent T&T systems, not tainted by the tobacco industry’s influence. Inexto’s preferred T&T is Codentify, a system originally developed by multinational cigarette manufacturer Philip Morris International and used by major tobacco firms. This, ITSA says, “calls into question the efficacy of the system and whether it can truly achieve what we believe it should do—that is, combat fraudulent trade of cigarettes, protect human well-being and help revenue authorities increase excise taxes”.

The Press report further says that the FBR in its earlier evaluation report stated: “The bidder has offered price of Rs. 0.731 with the unit of 1,000 stamps. However, the bidder claimed that this price quoted is per one stamp and not per quoted 1,000 stamps. As per Annex-6 of IFL, the bidder was required to offer rate per 1000 stamps and not per stamp. Therefore, the rate quoted in the bid is to be taken such i.e. 0.731 per 1,000 stamps. However, if contention of the bidder is accepted, the cost comes to Rs. 731 per 1,000 stamps. Apparently, the bidder has violated annex-6 of the IFL and if the bidder does not agree to Rs. 0.731 per 1000 stamps, the next lowest responsive bidder may be offered the license”. However, the FBR issued a letter on October 29, 2019 to the NRTC in which it stated that the Licensing Committee, constituted under Licensing Rules 2019 notified vide SRO. 250(I)/2019 dated February 26, 2019 as amended vide SRO.918(I)/2019 dated August 7, 2019, submitted its recommendations vide letter No UO 1(I) Chief (IR-OPS) (T&T)/2019, dated October 2019.

According to the Press report, “the recommendations of the Licensing Committee were considered in the Board-in-Council meeting dated October 14, 2019 in which the Board unanimously decided that the Member (IR-Operations), FBR, may take further steps in light of the recommendations made by the Licensing Committee, in the light of the Licensing Rules 2019 (SRO # 250(I)/2019, dated February 26, 2019) read with PPRA Rules 2004, said the FBR”. The perusal of the minutes of meeting dated October 14, 2019 issued by the Licensing Committee revealed that the NRTC has offered price of Rs. 0.731 with unit of 1000 stamps. However, NRTC claimed that this price is mistakenly declared, therefore, they filed the representation in Dispute Resolution/Grievance Redressal Committee for correction of unit price as Rs. 731 per 1,000 stamps instead of Rs. 0.731 per 1,000 stamps which was accepted by the Dispute Resolution/Grievance Redressal Committee vide order dated October 28, 2019 on the basis of clarification provided by the Law and Justice Division, the FBR stated in its letter. Taking this into account, the FBR has granted license to NRTC at price of Rs. 731 per 1,000 stamps for a period of five years to establish, maintain and operate the whole process/system of Trace and Trace System for tobacco products in Pakistan subject to the terms and conditions as stipulated in Licensing Rules 2019, Invitation for Licensing (IFL) and other relevant laws, the letter added.

According to a write-up [An end in sight for Pakistan’s fight against illicit cigarettes?], “in a country where the consumption of illicit cigarettes runs rampant and corruption is part and parcel of daily life, the move by FBR to grant licence for implementing the long overdue T&T system for tobacco products should be good news, however a closer look reveals that the current tender for technical T&T solutions is poised to be a dud, rather than a new hope–as the tobacco industry’s reach into the government is risking undermining the effectiveness of the proposed T&T system”. It alleges: “The FBR first issued the Invitation for License (IFL) in August this year—before making abrupt changes in the technical and financial score criteria, so that now the price of the system is the most important factor, rather than its proven effectiveness or compatibility with FCTC regulations. For a country facing accusations that the tobacco industry is deeply intertwined with the political-decision making process, these sudden alterations seem more than just a little suspicious”.

The write-up went on to add: “As it happened, the new emphasis on pricing effectively knocked established competitors in the field out of the competition. Instead, the main company in the running is now hitherto unknown NRTC, which has no track record in the sector. According to sources close to the dossier, NRTC procures its T&T technology from a subcontractor called Inexto – which has been promoting a tracking solution known as “Codentify” and which has proven links to Big Tobacco, particularly industry giant Philip Morris International (PMI)”. It further added: “It was PMI that in the mid-2000s created Codentify to promote it to governments all over the globe as a solution to the illicit cigarette problem. But since an industry devised and controlled T&T system is not allowed under the FCTC, Codentify was sold to a newly created company in 2016–Inexto–to give Codentify the at least a semblance of independence. Inexto has been offering the technology ever since, despite the fact that it is staffed with former PMI officials”.

The argument developed for not giving contract to NRTC in the write-up was “From this it becomes abundantly clear why Pakistan would be well-advised not to award the contract to NRTC: doing so would allow an industry Trojan Horse into the system, opening all doors to Big Tobacco, its lobbying and PR. Apart from rendering moot all hopes that Pakistan’s finances could profit from reduced tax evasion by tobacco producers, it would also be an international embarrassment to Islamabad. After all, Inexto is incompatible with Pakistan’s FCTC commitments and the Convention is ultimately only as strong as its weakest members”.  

The write-up after quoted Prime Minister Imran Khan’s “flamboyant rhetoric and recent order of a “crackdown” on illegal cigarettes, alleged that “big tobacco has managed to keep a firm hold on Pakistan’s tax structure for years—the Pakistani industry is dominated by two multinational companies and 25 local manufacturers that have succeeded in skewing policy in their advantage for years”.

Zahra Kazmi, a researcher, freelance writer, and a social activist, in her op-ed made the following startling revelations:

“British American Tobacco, a British multinational tobacco company based in London, is famous worldwide for controlling governments through intense lobbying activities and manipulates tax structure to for higher profits.

Currently British American Tobacco has been under investigation by Serious Fraud Office United Kingdom for allegations which surfaced against it in East Africa where it has been accused of making illegal payments to politicians and civil servants. BAT had to issue a statement after the news of investigation surfaced.

“We have been co-operating with the Serious Fraud Office (“SFO”) and British American Tobacco (“BAT”) has been informed that the SFO has now opened a formal investigation. BAT intends to co-operate with that investigation.”

This has happened since long in Pakistan too, however, BAT has been able to manage its corrupt practices. In early 2015 the British High Commissioner was accused of attending lobbying meeting in which British American Tobacco (BAT), the parent company of Pakistan Tobacco Company (PTC), lobbied Finance Minister Ishaq Dar and Minister of State for National Health Services Saira Afzal Tarar.

The meeting was aimed to convince Dar and Tarar to drop the government’s plan to print larger pictorial health warnings on cigarette packs. Though the then High Commissioner Barton has drawn harsh criticism from campaigners and medical experts in UK, however, the news went unnoticed here in Pakistan except being reproduced by one of the English language newspaper which was originally published in Financial Times.

Mr. Kamran who is an anti-tobacco campaigner said that BAT involvement in manipulating local laws has been quite obvious in many cases in recent past. He said that recently as a result of BAT lobbying, the Ministry of Finance proposed a third tier with the purpose to increase revenues from Tobacco products, however, in reality the slab was introduced to benefit BAT. The introduction of third tier/slab will actually result in increase sale of Tobacco products amounting to a total disregard for WHO Framework Convention on Tobacco Control he said.

On inquiring from FBR it was revealed that before there have been two tiers of taxation consisting of an upper tier and a lower tier. The upper tier tax was applied to tobacco products with a price above Rs. 72 and the lower tier tax was applied to tobacco products with a price below Rs. 72. The tax applied to products in the upper tier was Rs. 63.10 whereas the tax applied to the lower tier was Rs. 28.40.

Keeping in view WHO FCTC the MNHS recommended the Finance Ministry to raise the tax on the lower tier to Rs. 44 as tobacco products in this tier were consumed by almost 80% of consumers. Though the suggestions were agreed upon by the MoF, yet MoF, under the influence of British American Tobacco, introduced a third tier of taxation. Under this tier of taxation, tobacco products below the price of Rs.50 will draw the new tax at the rate of Rs.16. The BAT and FBR nexus has been highlighted in a recently published article in The News an English language daily. According to it “This provision has helped cigarette companies boost their sales.

For example, the British American Tobacco lowered the prices for its top three highest selling brands to below Rs50. The applicable lax therefore reduced from Rs32.98 (as per the new second tax tier) to Rs16 (as per the new third tax tier). The equation is simple: the lower the price more is the demand.”

This has also been confirmed from market survey. Mr. Adil who runs a tuck-shop in Karachi said, “The prices of Capstan by Pall Mall, Gold Flake and Embassy have been reduced drastically after this year budget which is very unusual.” He further conceded that the sale of these three cigarettes brands have gone many fold.

The write-up says that “years later, Pakistan’s regulatory capacity does not look any more promising. With many local politicians or their relatives sitting on the boards of tobacco companies, there is next to no incentive to change the way things currently are. According to Transparency International, Pakistan’s battle against corruption is failing”.

Numerous stories of tax scams appear in the media involving billions but nothing happens thereafter—in most of the cases, matters are hushed up and even reporters do not bother to follow up their own stories. However, the 2018 scam involving tobacco companies not only caused collossal loss of revenue but also played havoc with health of millions of Pakistanis. Due to lowering of taxes, consumption increased manifold but tax plunged drastically. Had it happened elsewhere in the world, by this time all the culprits would have been behind bars and adequately punished under the law—alas in our country such heinous crimes remain unnoticed and the culprits flourish by minting billions. They evade taxes and flout the rule of law with impunity. What makes things more painful is the fact that all this happened through collusive arrangement between the apex revenue authority and big audit firms that also render tax services to the companies they give clean reports!

A story appeared in Press on May 24, 2018 reveals that “the Public Accounts Committee (PAC) has recommended a Supreme Court-led investigation to unmask those who have given a whopping Rs.33 billion in benefits to two cigarette manufacturing companies by changing their tax structure”.

According to details, the Auditor General of Pakistan (AGP), in a special audit report, prepared on the direction of PAC, concluded that Federal Board of Revenue (FBR) sustained loss of Rs. 33 billion in just one year due to introduction of the third-tier tax structure through SRO 407(I)/2017 dated May 29, 2017 against the previous two-tier structure under SRO 473(I)/2016 dated June 3, 2016. The third-tier imposing just Rs. 800 as Federal Excise Duty (FED) was 50% less than the lowest previous rate. The AGP claims that after this change, two major players in the market shifted their famous brands to the lowest tax slab and sold their cigarettes with 50% reduction in FED. The AGP’s report alleges that this enhanced the sales of companies but revenues registered a substantial decrease.

The most alarming part of AGP’s report is: “Before price reduction, 23% smokers were smoking less than five cigarettes a day. But after the price reduction now only 1% of the total smokers smoke five cigarettes a day and others have increased consumption”. Where was the Ministry of Health when it was happening? After these revelations the Press and civil society should join hands to unveil the ugly faces behind the disastrous move. The Chairman PAC reportedly claimed that he had the lists of officials of FBR “who took the gifts”. Why did Chairman PAC wait till the end of the tenure of PAC to reveal all this? It is an ugly joke with the nation. Loss of revenue is important but more important is health of citizens. The Parliament should have imposed sin tax of over 200% on cigarettes to discourage smoking. The UK has recently imposed sugar tax to refrain people from consuming fizzy drinks. This is how taxes are used to safeguard health of citizens and counter wasteful consumption.

It is pertinent to mention that Pakistan is amongst one of the largest consumers of tobacco in the world—around 25 million Pakistanis of 15 years and above are smokers. The World Health Organization (WHO) and all other world bodies recommend that at least 70% of price of the cigarette should be levied as tax in order to discourage smoking but FBR has been lowering the same for the powerful merchants of death—big cigarette companies.

Till fiscal year 2013-14, FED collection from tobacco industry was based on two-tier tax structure and collection was Rs. 70.73 billion—99% of it came from two multinational companies (MNCs). In addition, the sector paid Rs. 17.7 billion as sales tax. In 2015-16, the collection from tobacco sector under FED and sales tax reached Rs. 114.2 billion. After the introduction of the third tier, turnover of MNCs almost doubled but FED collection plunged to Rs. 60 billion. The tax paid in 2016-17 by MNCs was far lower than mandatory requirement of 72%—during the first ten months of the current fiscal year it went as low as 42%.  

One wonders why a high-powered body like PAC suggested investigation by Supreme Court in a matter where tax was imprudently reduced by FBR through an SRO without the approval of Parliament. On the one hand the outgoing Parliament has been complaining that Supreme Court was encroaching upon its territory and on the other PAC has now asked for intervention of apex court in a matter that falls in its exclusive jurisdiction. PAC after failed to bring the culprits to book wants to send the ball to another court! Obviously there was lack of sincerity of purpose on the part of PAC and Parliament during their term.

The following comments were made in an op-ed, Yet another tax scam:

Whatever the outcome of this tax scam, one thing is clear that members of National Assembly throughout their tenure of five years showed little interest in examining such cases, punishing the culprit and retrieving tax losses through PAC. It could have substantially increased tax collection and establish a tax culture leading to improving voluntary compliance.

The report of AGP confirms that nothing has changed in FBR even after the so-called reforms funded through loans worth millions of dollars. It is a sad reflection on FBR’s top management. The mafia-like acts of FBR has encouraged the corrupt, criminals, tax evaders, smugglers, drug dealers, terrorists, rent-seekers, and profit-hungry unscrupulous businessmen not to pay taxes but just give officials their “share”. In quid pro quo the FBR’s stalwarts kept on drafting numerous amnesty schemes for them to whiten their untaxed assets by just paying 2 to 5 percent.

The tax officials occupying key posts are holding the same for serving political masters and not the people. They create favourable tax regimes and concessions for the mighty businessmen—the episode of giving unprecedented relief to tobacco companies is a classic case.  The unholy alliance between the tax evaders and their advisers and tax officials has been depriving the national exchequer of billions of rupees.

Pakistan is controlled and ruled by different mafias—people having collossal untaxed assets generated. These mafias have crippled State institutions. The FBR, being their handmaid, protects them through tax amnesties or non-action. The tax evaders, profit-sharking MNCs, plunderers of national wealth, the corrupt, drug barons and extortionists have captivated the state functionaries. In these circumstances, tax evasion and frauds can only be countered through a permanent public commission, representing the people from all walks of life, which should probe the cases, release its reports in the Press on monthly basis, recommend actions for retrieval of tax losses and suggest punitive measures against the culprits”.

The above scandal surfaced during the Government of Pakistan Muslim League [Nawaz] [2013-18] but thereafter neither the interim government, installed on June 1, 2018 nor the PTI Government took any cognizance of the matter—though it was a fit case for NAB. Prime Minister Imran Khan since taking oath on August 18, 2018 has been making tall claims to dismantle all the existing structures of rent-seeking and corruption, but utterly failed to follow WHO FCTC) Protocol to implement T&T systems as bidding process reveals. He also failed to impose health tax on cigarettes in the budget 2019-20 even after giving approval in person and that of his cabinet.  

Chairing a cabinet meeting on May 29, 2019, Prime Minister Imran Khan decided to end the tax-free cigarette facility for the prime minister, chief ministers and governors of all provinces to control the use of tobacco. He said that the prime minister, chief ministers and governors would now pay the same taxes as other consumers. He also gave the go-ahead for imposing health tax of Rs. 10 per pack of cigarette and said that “earnings from that would be used by the health ministry on welfare projects”. It was also decided that 1% health tax would be imposed on all beverages in the upcoming budget.

In February 2019, the National Health Services and Coordination Division presented a draft of the Health Levy Bill 2019, proposing imposition of a health levy on cigarettes and sugary beverages. However, the FBR opposed the levy on the cigarette manufacturing industry for obvious reason as state above. The Finance Division, on the other hand, agreed to impose the tax on cigarettes. The Cabinet Division argued that imposition of any tax fell within the meaning of money bill as provided in Article 73(2)(a) of the constitution. A money bill would be moved in the National Assembly after seeking approval of the cabinet in accordance with Rule 16(1)(a) and (d) of the Rules of Business 1973. In the meeting, the PM also gave approval for rolling back the third slab of federal excise duty introduced by the Pakistan Muslim League-Nawaz (PML-N) government, which brought down the duty and led to a reduction of billions of rupees in revenue collection, stated officials.

Strangely, the PTI Government later on dropped the cabinet’s decision of imposing health tax on cigarettes in the budget for fiscal year 2019-20 that was to generate funds for development of the health sector. According to a newspaper, “certain lobbyists appeared to be influencing the affairs and the decision on health levy was not implemented”. Quoting certain sources, the newspaper’s report revealed:

“….the Federal Board of Revenue (FBR) chairman pointed out that annual revenue collection from cigarette manufacturers was projected to stand at Rs114 billion. However, after ending the third tier of federal excise duty (FED) introduced by the previous Pakistan Muslim League-Nawaz (PML-N) government, the annual revenue receipts from the industry would go up to Rs150 billion. Revenue collection from the cigarette industry was Rs114 billion in 2016 but after introduction of the third FED slab, the revenue flow dropped to Rs80 billion in 2017. However, officials of the health ministry did not agree with arguments of the FBR chief, saying the cabinet had taken a decision to impose health tax. However, they said, the tax was not made part of the Finance Bill 2019.

According to the ministry officials, a certain lobby has managed to create hurdles in the way of including the health tax in the finance bill. …….the cabinet in its meeting held on May 28, 2019 approved the medium term macroeconomic framework after reviewing presentation of the Finance Division on the budget strategy paper. Furthermore, the cabinet decided to impose health tax on tobacco at Rs10 per pack of 20 cigarettes and on carbonated drinks at Re1 per 250ml bottle through the Finance Bill.

It also agreed that the revenue generated through the health tax would be earmarked for development of the health sector over and above the budgetary allocation.

The cabinet decided that the finance bill would also include measures for tackling the illegal manufacturing and trade of cigarettes and other tobacco products.

The Cabinet Division also wrote a letter on June 3 to the finance secretary, national health services, regulation and coordination secretary and revenue secretary to implement the decision within seven days under Rule 24 of the Rules of Business 1973 in coordination with other divisions, where necessary.

An implementation report may be furnished to the Cabinet Division within seven days of the receipt of the decisions, the cabinet said”.

The sordid story of mafia-like operations of tobacco companies in Pakistan exposes the efficacy of State. Pakistan aptly fits in the concept of a “soft state”—famously articulated by the Nobel Laureate, Swedish sociologist Gunnar Myrdal in his 1968 three-volume work, Asian Drama: An Inquiry into the Poverty of Nations. It is a broad based assessment of the degree to which the state, and its machinery, is equipped to deal with its responsibilities of governance. The more soft a state is, the greater the likelihood that there is an unholy nexus between the law maker, the law keeper, and the law breaker.


The writers, lawyers and authors of many books, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).

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