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Illicit cigarettes trade: health & tax issues

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 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 speakers and participants at “Breakfast with Jang” session on “tax evasion and illicit tobacco trade in Pakistan”, held in Lahore on March 26, 2021, agreed on one thing that crack down on illicit cigarette trade is essential to save millions hooked on it and to ensure that the state gets due taxes as losses are colossal because of unabated smuggling, counterfeit and non-duty paid production and its distribution. The details of the event are already covered in a story published in The News on March 27, 2021. All over the world, the consensus is that the most effective way to reduce tobacco use is to raise the price of tobacco products through tax increases and ensure that the tax increases are reflected in prices. In Pakistan, we have been seeing the opposite as highlighted in the session that “more than 200 local illicit cigarette brands are selling at Rs. 20 to 40 whereas minimum tax per pack is Rs. 42.12 and minimum price is Rs. 62.76. These minimum tax and minimum price law violations compromise government’s fiscal objectives and the public health agenda”.

In a paper, Tobacco Taxes in Pakistan (2013) jointly written by Shahid Javed Burki, Aisha G. Pasha, Hafiz A. Pasha, Rijo John, Prabhat Jha, Aftab Anwar Baloch, Ghulam Nabi Kamboh, Rajeev Cherukupalli, Frank J. Chaloupka, it was recommended: “Strengthen tobacco tax administration, increase enforcement, and tax duty free sales of tobacco products in order to reduce tax evasion and avoidance and earmark tobacco tax revenues for health purposes, including health promotion and tobacco control”. It is obvious that successive governments have not paid any heed to it and other recommendations made in this and many other papers and articles.

In recent days, the Federal Board of Revenue (FBR) issued press releases saying that it started crackdown on the illicit cigarette and other tobacco products “under the vision and commands of Prime Minister”. In other words, they admitted that it was not their duty now or in the past but what matters is “command of the Prime Minister”! This attitude itself shows how lax our agencies were to counter this menace and take defaulters to task who are playing with the health of citizens.

Pakistan is among one of the largest consumers of tobacco in the world—at the end of 2020, around 28 million Pakistanis of 15 years and above were smokers. Millions of young people (future of Pakistan) are being hooked on narcotics abused through cigarettes, other hazardous products leading to deaths of thousands every year from tobacco related diseases—the majority of these from lung and other cancers, strokes, ischemic heart, other cardiovascular and respiratory diseases. In the face of this reality, the merchants of death are present even in elected houses, shamelessly intimidating the FBR and other law enforcement agencies of dire consequences if they are touched. Is the Prime Minister not aware of them? This rampant illicit trade is not possible without political patronage and control of the law enforcement agencies through money power. 

The legitimate question is how twice FBR awarded contract for license of track and trace (T&T) system of tobacco products by not following the rules. The first one was in violation 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. The then Chairman FBR claimed that the contract was awarded to the lowest bidder and as per rules. However, Islamabad High Court declared it unlawful 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 of IHC].

The second one of Rs. 25 billion was suspended by the Sindh High Court on a writ petition on March 13, 2021. The court has issued notices to FBR and the federal government, fixing the case hearing for April 5, 2021. The Prime Minister showed annoyance but did not fix responsibility for irregularities committed twice by FBR. Is it lack of capacity or was it a deliberate act? Many eyebrows are raised. In both the cases, the concerned were not sacked after giving right under Article 10A of the Constitution. Even no inquiry was conducted to unveil the forces behind it. It was alleged in media that one official of the FBR was transferred from Peshawar to Quetta for raiding a factory producing counterfeit cigarettes. The factory owner accused FBR of blackmailing him.

On September 25, 2020, there was a protest in Islamabad by civil society and lawyers joining hands with residents of Muzaffarabad and other parts of Azad Jammu & Kashmir (AJ&K) against production/sale of counterfeit cigarettes, having serious health implications and causing revenue loss of billions of rupees to the Department of Inland Revenue (AJ&K) and FBR.

The solution is proper monitoring of Green Leaf Threshing units (GLTs)—the main link in supply chain of 75,000 plus farmers, 500,000 plus retailers and 45 plus manufacturers. Only 11 GLTs are supplying raw material to cigarette manufacturers. It is strange that FBR with huge workforce cannot monitor just a few GLTsas per chapter XVI of the Federal Excise Rules 2005 that exclusively deals with it.

Pakistan singed FCTC in May 2004 and ratified it in the same year. After lapse of over 16 years, it has still failed to implement T&T to curb illicit cigarette trade. According to one estimate, Pakistan’s revenue loss from illicit cigarette trade has now increased to more than Rs 80 billion per annum from Rs 27 billion in 2012.


The writer is Advocate Supreme Court and Adjunct Faculty at Lahore University of Management Sciences (LUMS). Email: ikram@huzaimaikram.com; Twitter: @drikramulhaq

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