Huzaima Bukhari & Dr. Ikramul Haq
Illicit trade in tobacco products (ITTP) is a global occurrence, affecting all regions and countries. It holds an allure for criminals to engage in it as tobacco products are light, small, easy to transport and to conceal. Tobacco is one of the most smuggled commodities in the world, allowing offenders to amass huge profits. Further, penalties are often not sufficient to act as a deterrent—Interpol, Countering Illicit Trade in Tobacco Products: A Guide for Policy-makers.
“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 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
The State, its corporations, instrumentalities and agencies have the public duty to be fair to all concerned. The limited scope of judicial review envisages examination of the question whether there are any malafides, arbitrariness, material irregularity, or unreasonableness in the decision-making process leading to the award of the public contract. Judicial review is concerned with reviewing not the merits of the decision by an executive authority, but the decision-making process leading to the award of a public contract. The Court can examine the decision-making process and interfere if it is found vitiated by malafides, unreasonableness, arbitrariness, or material irregularity. Before interference the Court has to be satisfied that the decision is such that no responsible authority acting reasonably and in accordance with the relevant law could have reached—Judgemnet of Islamabad High Court National Institutional Facilitation Technologies (Pvt.) Limited v Federal Board of Revenue and others [W.P.No.3995 of 2019].
“Only two [tobacco] companies pay 98 percent of total tax [tobacco collection]. The remaining 40% companies pay meagre 2% tax”—Prime Minister, Imran Khan
“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
Despite all the recommendations to the government to scrap the third tier, as it was resulting in the loss of both health and money to the country, the influential tobacco lobby in the country was successful in keeping the slab intact in the revisions made to the Finance Bill in September 2018 by the new government”—Economics of Tobacco Taxation & Consumption in Pakistan, PIDE, 2018
The loss in Federal Excise Duty (FED) due to illicit and smuggled cigarette sector alone is Rs. 100 billion a year. It can be plugged by trace and track (T&T) system—Flourishing tobacco industry and “soft sate”, Surkhyian, November 22, 2019.
“….19.1 percent of Pakistani population, which includes 31.8 percent of men and 5.8 percent of women, consume tobacco in one form or the other. Among these tobacco consumers, 9.6 percent of the overall adult population (17.9 percent men, 1 percent women) is daily cigarette smokers. Whereas, 2.7 percent of the adult population (4.4 percent men, 1 percent women) smoke water pipes daily. Furthermore, 7.1 percent adults (10.5 percent men and 3.5 percent of women) use smokeless tobacco daily. Among the young population, 10.7 percent of all youth—including 6.6 percent girls and 13.3 percent boys—consume tobacco or tobacco products—Demographic and Health Survey 2017-18, National Institute of Population Studies, Islamabad
It is a well-established and internationally recognised fact thatillicit trade in tobacco products(ITTP) and counterfeiting not only reduce turnover and profit for honest businesses and local producers, they also cause revenue agencies to lose taxes. 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, infrastructure, 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.
It is lamentable that after lapse of many years to fulfill its international obligation Pakistan failed to implement track and trace (T&T) system of tobacco products and latest bid was declared unlawful by Islamabad High Court with the directions that “FBR is at liberty to initiate a fresh bidding process strictly in accordance with the law” [details can be seen in the order National Institutional Facilitation Technologies (Pvt.) Limited v Federal Board of Revenue and others available on the website]. In this article, however, we are highlighting the various issues relating to ITTP and its multi-dimensional effect on our governance, politics and society.
Pakistan is a signatory to the World Health Organisation’s Framework Convention on Tobacco Control [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. It is a fact that no regime showed seriousness in implementing track and trace in Pakistan to counter ITTP, recoup revenue losses due to illicit tobacco trade and check tax avoidance by other industries through suppression of sales. The Government of Pakistan Tehreek-i-Insaf (PTI) took the initiative but committed fatal errors in awarding the contract as highlighted by the IHC in its above-referred judgemnet.
Pakistan’s failure to implement T&T systems to curb illegal cigarette sales for the last many years proves 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 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 the deal for the release of US$ 6 billion bailout.
In a meeting of sub-committee of National Assembly on agriculture dealing with proposed tax on ‘Duty-Not-Paid’ cigarette sector, held on June 2, 2020, the following facts/issues were highlighted from our side:
– The Federal Excise Duty [FED] rate on Tier-II increased by 93% in last 8/9 months. Tier-I increase was over 30%.
– Compliant industry increased prices of lower Tier-II brands to Rs. 78 while the ‘Duty-Not-Paid’ sector made a minimal increase to Rs. 38. This led to a growing price differential between the duty evading packs and legitimate packs to Rs. 40.
-‘Duty-Not-Paid’ cigarette sector now at 37.6% as on March 31, 2020 which means that essentially the overall consumption has remained the same but consumers due to affordability challenges are buying cheap duty evading cigarette packets that are selling below the Government mandated price of Rs. 62.76 and even the minimum tax per pack of Rs. 44.
– Possible decline in FBR’s revenues by 6.5%—from 124 billion last year to maybe 116 billion this year despite massive increases in FED. The revenue forecast in last year budget speech was Rs. 147 billion which will not be met and there could be even a decline vis-à-vis collection from previous year.
– Potential revenue loss is of Rs. 77 billion because of illicit tobacco trade and counterfeit cigarettes, smuggling every year, in addition to the decline in revenue because of evasion by ‘Duty-Not-Paid’ sector.
– In addition to excise and taxes, the contribution of two multi-nationals is Rs. 43.9 billion rupees per annual. This 43.9 billion and other levies are at risk if ‘Duty-Not-Paid’ sector grows as the compliant units will lose market’s share as unable to operate in the current scenario and with existing footprint.
– Stricter monitoring of Green Leaf Threshing units (GLTs) is needed. There is a link in supply chain of 75,000 plus farmers, 500,000 plus retailers and 45 plus manufacturers but only 11 GLTs are supplying raw material to all manufacturing units of cigarettes.
– Proposed advance adjustable tax on GLTs of Rs. 500/kg is meant to achieve documentation. This adjustable advance tax is to be set off against payable FED against final liability that is to be paid by the cigarette manufacturers and not by the tobacco growers. The actual FED that manufacturers pay becomes this input tax that is adjusted and cleared with no additional payments. It is a measure to strengthen documentation and increase monitoring at every stage in the supply chain.
– Last time when this advance tax was raised, it reduced the operation of ‘Duty-Not-Paid’ sector. They resorted to various tactics trying to malign this much-needed documentation measure and saying it was an additional tax on farmers which was certainly not the case. The law is clear and this is not recoverable or can be passed on to the farmers. This measure of increasing an adjustable advance tax is to ensure that if it had to be reclaimed and adjusted by the ‘Duty-Not-Paid’ manufacturers, then at least, in part a higher portion of the actual due FED would be ascertainable/payable. This would unearth operators that are under-reporting and evading billions in taxes each year.
– Addressing affordability challenges, increasing enforcement and cracking down on supply chain and their source is pivotal to the sustainability of compliant units.
All purchases of tobacco are through Tobacco Board or their contractors as required under their law after paying cess and advance income tax of 5%. Then the question arises how ‘Duty-Not-Paid’ manufacturers bypass it? How GLTs supply them tobacco out of books and if this is what is happening then where is monitoring of FBR?
Section 236X of the Income Tax Ordinance, 2001, inserted in 2017, reads as under:
“236X. Advance tax on tobacco.– (1) Pakistan Tobacco Board or its contractors, at the time of collecting cess on tobacco, directly or indirectly, shall collect advance tax at the rate of five percent of the purchase value of tobacco from every person purchasing tobacco including manufacturers of cigarettes.
(2) Tax collected under this section shall be adjustable”.
Has FBR ever tried to use the data from above provision and reconciled it to quantify tax evasion, if any, by ‘Duty-Not-Paid’ manufacturers.
A write-up published in October 2019, after quoted Prime Minister Imran Khan’s “flamboyant rhetoric and 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 of November 10, 2017 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 giving them 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 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 was an ugly joke with the nation. Loss of revenue was important but more important has been health of citizens. The Parliament should have imposed sin tax of over 200% on cigarettes to discourage smoking as done by many countries. The UK in 2018 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 Federal Board of Revenue (FBR) in the past has been lowering the same for the powerful merchants of death—big cigarette companies and also failed to counter illicit cigarette manufacturing as well as cracking down on counterfeit and smuggled products.
Till fiscal year 2013-14, Federal Excise Duty (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, Pakistan Tobacco Company (PTC)— part of British American Tobacco, the world’s largest group and Philip Morris Pakistan Limited (PMPKL)—an affiliate of Philip Morris International (PMI), a leading international tobacco. In addition to FED, the sector paid Rs. 17.7 billion as sales tax. In 2015-16, the collection from this sector under FED and sales tax reached Rs. 114.2 billion. After the introduction of the third tier, turnover of PTC/PMPKL almost doubled but FED collection plunged to Rs. 60 billion. The tax paid in 2016-17 by these two companies was far lower than mandatory requirement of 72%—during the first ten months of the said fiscal year it went as low as 42%.
When the scam surfaced, strangely, the high-powered body like Public Accounts Committee (PAC) suggested investigation by Supreme Court whereas tax was imprudently reduced by FBR through an SRO [Statutory Regulatory Order] bypassing the Parliament and in violation of Article 77 read with 162 of the Constitution as explained by Supreme Court of Pakistan in Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others [(2013) 108 TAX 1 (S.C. Pak)]. On the one hand the Parliament during 2013-18 was critical of Supreme Court alleging that it had been encroaching upon its territory and on the other PAC asked for intervention of apex court in a matter that was in its exclusive jurisdiction! After failing to bring the culprits to book, PAC wanted to throw the ball in another’s court! Obviously there was lack of will/sincerity on the part of PAC and Parliament during their tenure [2013-18].
In relation to above scam, the following comments were made in an op-ed, Yet another tax scam, published on May 27, 2018:
“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) a PMLN, but thereafter neither the interim government, installed on June 1, 2018 nor the coalition Government of Pakistan Tehreek-i-Insaf (PTI) took any cognizance of the matter—though it was a fit case for National Accountability Bureau (NAB). Prime Minister, Imran Khan since taking oath on August 18, 2018 has been making claims to dismantle all the existing cartels, monopolies, rent-seeking structures and corruption, but so far his government has failed to even enforce WHO FCTC and implement T&T system as bidding process is declared unlawful by the Islamabad High Court [discussed in the first instalment].
The Prime Minister also did not succeed in imposing health tax on cigarettes in the budget 2019-20, even after giving approval, in person and by cabinet, as Ministry of Law overlooked Articles 144 and149 of the Constitution. Chairing a cabinet meeting on May 29, 2019, Prime Minister 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 reasons as stated by PAC. 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 Prime Minister also gave approval for rolling back the third slab of FED introduced by the Government of Pakistan Muslim League (Nawaz), which brought down the duty and led to a reduction of billions of rupees in revenue collection, as per officials of the Ministry.
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. Had it been done we could have garnered sufficient funds to fight Covid-19 epidemic effectively. 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 [Budget 2019-20: Health tax on cigarettes ignored] published on June 13, 2019 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 Rs.1 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”.
Even in budget 2020-21, no effort was made to levy heath tax on cigarettes while facing challenge of Covid-19 outbreak. For levying this tax, the Cabinet in 2019 and till today has failed to take note of the fact that any provincial assembly, (Khyber Pakhtunkhwa PTI has two thirds majority and in Punjab and Baluchistan coalition governments) by a resolution under Article 144 of the Constitution can ask National Assembly, to impose health tax on their behalf and money would go into National Health Fund to provide all citizens modern healthcare to meet challenges like Covid-19 epidemic. It is strange that the Law Ministry did not give this advice even after judgement of Supreme Court on Article 149 of the Constitution in Suo Muto Case 1 of 2020.
Many countries have imposed sin tax on tobacco and alcohol and United Kingdom in 2018 imposed Soft Drinks Industry Levy (SDIL) that purports to put a charge of 24p on drinks containing 8g of sugar per 100ml and 18p a litre on those with 5-8g of sugar per 100ml, directly payable by manufacturers to Her Majesty Revenue and Customs (HMRC). Had we imposed similar taxes sufficient amount could have been collected and diverted towards improving healthcare system and meet catastrophes like Covid-19 epidemic. The PTI Government again missed this chance in federal budget for fiscal year 2020-21. However, it can still be presented after taking provinces on board.
A story [Tobacco industry’s ad on illicit cigarette trade a ‘smokescreen’] published on May 14, 2020 made the following claims:
The Coalition for Tobacco Control (CTC) Tuesday expressed shock at the publication of an advertisement backed by the tobacco industry, calling for stopping illegal trade of cigarettes in Pakistan.
The advertisement, published on the front page of a leading English daily, claims that Pakistan annually loses Rs. 44 billion to illicit cigarette trade. It further claims that this money can be used to educate 2.5 million students, provide electricity to 250,000 homes, and to feed 9 million people with three meals a day for a month. The ad asks for signing a pledge for stopping illicit cigarette trade at www.stopillegaltrade.pk, which is financially backed by Philip Morris Pakistan.
“This ad can be described as the best example of smokescreen,” commented Khurram Hashmi, the National Coordinator of CTC-Pakistan. He added that as Pakistan, like the rest of the world, is facing economic meltdown because of Coronavirus, the tobacco industry is trying to present itself as a helping hand.
Khurram said, according to the World Bank’s country overview of tobacco use in Pakistan, the tobacco industry overestimates illicit trade as one of the ploys to plan decline in the government’s revenues. “The report says a public impression is created that illicit cigarette trade in Pakistan is very massive and is growing with every excise increase.”
The other two ploys, Khurram said, are forestalling (increases in production or stock of the product in anticipation of a tax increase), and price over-shifting (the increase of cigarette prices by more than the tax increase and the inflation rate would require).
“We need to be very careful and, at the same time, vigilant to the ploys that the industry is adopting in these tough times, especially when the budget is just around the corner,” CTC chief added. “This is nothing but a futile attempt to avoid tax raise on their life-threatening product, cigarettes.”
CTC-Pakistan works to strengthen the development and implementation of policies based on provisions of the Framework Convention on Tobacco Control (FCTC) through advocacy campaigns and acting as a technical resource for the Ministry of National Health Services. It has 267 civil society organizations working on tobacco control issues in Pakistan.
The current scenario of evasion of various taxes, duties and other levies by unscrupulous cigarette manufacturers, counterfeit and smuggled products, inefficiency of FBR and Pakistan Tobacco Board [PTB] is summarized below:
- All purchases of tobacco are through PTB’s contractor after bidding process, required under relevant law/rules [see details at: http://www.ptb.gov.pk/node/11 and http://www.ptb.gov.pk/downloads] after paying cess and advance income tax of 5% under section 236X of the Income Tax Ordinance, 2001 inserted by Finance Act, 2017, that reads as under.
Section 236X. Advance tax on tobacco.– (1) Pakistan Tobacco Board or its contractors, at the time of collecting cess on tobacco, directly or indirectly, shall collect advance tax at the rate of five percent of the purchase value of tobacco from every person purchasing tobacco including manufacturers of cigarettes.
(2) Tax collected under this section shall be adjustable.
- The question is: how do buyers bypass section 236X of the Income Tax Ordinance, 2001? According to a former Chairman of PTB, who also served in FBR as a senior officer commented: “The advance income tax paid by the companies is not material as they pay it on declared purchases. The transaction is already documented…and since it is adjustable it does not add to the revenue. Important is the tax collected by the PTB’s contractor. Frankly, PTB has no control over him because he is the successful bidder in an auction and his sole purpose is recovering more amount than his bid to make profit. As per the agreement with PTB he is under obligation to provide information about purchasers which he never does. He is like any other ordinary octroi contractor. Interestingly no such tax on tobacco purchase is collected in Punjab”. This is an open admission of leakage at the very first stage of buying tobacco from growers! Another official of FBR, who has vast experience of monitoring and studying this sector endorsed the above statement and recommended: “The only point where we could enforce things is the Green Leaf Threshing (GLT) stage before we go for T&T”.
- Allegedly, the non-duty paid companies avoid 5% tax under section 236X of the Income Tax Ordinance, 2001 by declaring less tobacco purchases to PTB. They allegedly purchase 2/3 times more tobacco illegally. Collection under section 236X of the Income Tax Ordinance, 2001 in FY 2017-18 was Rs. 569 million, in FY 2018-19, Rs.503 million and in the current FY 2019-20, up to April 2020, Rs. 546 million. Party-wise bifurcation is not available at website of FBR or in any published report. It is obvious that collection under section 236X of the Income Tax Ordinance, 2001 is not properly made/deposited/monitored vis-à-vis total production/sale of tobacco. FBR has also not reconciled in tax year 2018 and 2019 collection under section 236X of the Income Tax Ordinance, 2001 with total annual production of tobacco and total supplies by GLTs. PTC and PMPKL claim to have been making full payments under section 236X of the Income Tax Ordinance, 2001 by cross cheques adjusting it against income tax payable. FBR can/should cross check it from PTB vis-à-vis total purchases made by them and match it with their production/sales.
- According to various Press reports and media campaigns, mostly sponsored by PTC and PMPKL, the total cigarette market in Pakistan is around Rs. 80-85 billion sticks and there are two sectors—one what they call “legitimate taxpaying sector” with 67% market share and a contribution of 98% in revenues, while the other is the “tax-evading sector” with 33% market share and a contribution of only 2% in FBR’s revenues”.
- “In Pakistan 75% of tobacco is cultivated in KPK and 25% in Punjab”— https://www.textroad.com/pdf/JBASR/J.%20Basic.%20Appl.%20Sci.%20Res.,%207(4)1-17,%202017.pdf.
- There is also alleged tax evasion by the no-duty paid companies of Rs.10 per kilogram (kg) of total tobacco volume purchased but not reported to PTB to avoid development cess. These tax-avoiding companies allegedly do not pay even Rs. 300 per kg tax on packed tobacco after processing by GLTs that is adjustable against cigarette production. How do tax-defiant companies bypass this tax and GLTs supply them processed tobacco out of books? FBR needs to explain it. It is shocking that with staff of over 22,000, FBR could not monitor just a handful of GLTs.
- There is Rs.10 per kg tax on packed tobacco by a GLT unit that non-tax paying companies have been allegedly avoiding to the extent of illegally purchased tobacco. It can be verified from PTB by ascertaining the total production of tobacco in a year that is much higher than the declared purchases to PTB. When 100% tobacco produced by the farmers is sold/purchased in the market, why is the total revenue so much lower?
The above facts prove beyond any doubt massive evasion by many buyers not only of 5% advance and adjustable tax under section 236X of the Income Tax ordinance, 2001 but also FED, sales tax, Rs.10 per kg levy on processed tobacco at GLT stage as well as Federal Tobacco Cess and Tobacco Development Cess levied by Khyber Pakhtunkhwa Assembly through Khyber Pakhtunkhwa Finance Act, 1996.
All the above allegations, claims, facts and figures need to be investigated by FBR and other agencies, namely PTB, Federal Investigation Agency (FIA) as fraudulent practices are causing huge loss to the national exchequer. All the culprits and their abettors should be tried under the law after fulfilment of conditions envisaged under Article 10A of the Constitution— fundamental right of every citizen. Along with criminal trials, concrete measures for recovery of lost revenues should be initiated by FBR and other concerned authorities responsible for collecting federal tobacco cess and tobacco development cess. The NAB must also take action if connivance of state officials is proved.
The following claims are made by two big players (PTC and PMPKL) having booming business and lion’s share in cigarette industry in Pakistan that is health hazard and our successive governments have been more interested in collecting revenues from them rather than discouraging the consumption of their undesirable products and levying health tax:
- CONSUMPTION: Total consumption of cigarettes in Pakistan has remained constant at approximately 80-85 billion cigarettes per year for the past 10 years. This can be validated by the tobacco leaf production volume, according to PTB records. Assessing cigarette consumption in Pakistan based on legally declared cigarette sales year-on-year would be misrepresentative since cigarette consumption has remained stable over the past 10 years. However, consumption shifts between duty-paid legal cigarettes to non-duty paid illicit cigarettes. Hence to assess consumption, one has to take into account declared and undeclared volumes. Undeclared volumes today stand at almost 40% of the total market.
- ILLICIT CIGARETTE TRADE: Locally manufactured non-duty paid cigarettes produced by cigarette companies situated in Khyber Pakhtunkhwa and Azad Jammu and Kashmir is the major cause of loss of government revenue as these companies continue to under-declare their production. Excise related price increases of legal cigarettes widens the price gap between duty-paid legal cigarettes and non-duty paid illicit cigarettes which encourages down trading and has resulted in the boom of illicit cigarettes trade. As stated above, cigarette consumption has remained stable between 80-85 billion sticks per year. These illicit cigarettes sell between price point of PKR 30-45 per pack which is lower than the FED and sales tax payable per pack.
- THIRD-TIER: FBR data shows that in fiscal year 2016-17 cigarette revenue saw a major decline from PKR 114 Billion (FY 2015-16) to PKR 83 Billion (FY 2016-17). The only reason for this decline was the shift of consumption from duty-paid legal cigarettes to non-duty paid cigarettes. The third-tier was introduced as a fiscal measure to arrest the growth of illicit cigarettes by reducing the price gap between duty-paid legal cigarettes and non-duty paid illicit cigarettes. It is a sheer misconception and misrepresentation of facts that cigarette revenue declined after the introduction of the third-tier. Government revenue data is conclusive evidence that third-tier was a successful measure to increase its revenue, in the absence and lack of enforcement capability.
- FCTC ARTICLE 6: FCTC, International Monetary Fund (IMF) and the World Bank acknowledge that high taxation with lax enforcement creates incentive for illicit cigarette trade. Lack of enforcement in tobacco and in number of other sectors is a harsh reality in Pakistan which we have to be accepted. FCTC Article 6 also recognizes the sovereign right of nations to formulate tax policies in line with their national circumstances.
- TRACK & TRACE: It is a misrepresentation by competitive bidders to malign one of the competitors in an attempt to derail the process because they have not won the bid. There is no link of legal tobacco industry with any of the bidders. The solutions of various bidders have been assessed by a high-powered FBR team for data integrity, system independence and profile of all bidders. All bidders were given full opportunity to present their system subsequent to which an independent team chooses the best suitable solution.
The counter allegations against the two main players (PTC and PMPKL) and suggestions to remedy the situation by local companies/pressure groups/NGOs as well as by World bank are:
- World Bank in its study: Pakistan: Overview of Tobacco Use, Tobacco Control, Legislation & Taxation claims: “To our opinion, the tobacco industry carefully planned…decline of revenue (probably back in 2013) with the aim to reduce the excise rate. As we saw, this aim was achieved”.
- Government if really wants to stop illicit trade cigarettes they must catch biggest distributors in Pakistan having offices and warehouse at various places.
- No need to go after wholesaler or retails. If agencies interrogate and take action only against 10 to 15 big wholesale dealers almost 80 to 90% illicit sale will be eliminated.
- Government must stop PTC and PMPKL from supplies to their Afghan distributors having allegedly distribution outlets in each city of Pakistan. If agencies get hold of them and properly investigate and interrogate them, the real faces behind the illicit trade in cigarettes would be unveiled.
The above is sordid story of mafia-like operations of illicit tobacco trade in Pakistan, whether all players are complying with laws or not, it cannot be established unless incontrovertible evidence is presented before an independent commission or courts. One thing is clear that illicit trade in tobacco products exposes the efficacy of the 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-makers, the law-keepers, and the law-breakers. In a nutshell, this is the case of illicit trade in tobacco products in Pakistan destroying health of millions, especially the youth but governments are interested only in revenues and not even health tax as discussed above!
The writers, lawyers and authors of many books, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).