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Menace of counterfeit cigarettes

Huzaima Bukhari & Dr. Ikramul Haq

The protest in Islamabad by civil society and lawyers joining hands with residents of Muzaffarabad and other parts of Azad Jammu & Kashmir (AJ&K) on September 25, 2020 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 Federal Board of Revenue (FBR), at last forced both the agencies to formulate a joint strategy to take action against the culprits. In coming days, their action will show how sincere and committed they are against the mafias involved in illicit trade in tobacco products (ITTP).   

The representatives of civil society from AJ&K warned that if immediate action was not taken, they would have no option but to take direct action for closure of units as due to apathy of administration and police, the youth was becoming easy prey to these mafias. For the last many years, the concerned authorities have miserably failed to clampdown on manufacturers of illicit/counterfeit cigarettes. Reportedly, FBR’s Directorate General of Intelligence & Investigation Inland Revenue and Inland Revenue Enforcement Network of AJ&K assured them of a joint action against all the units involved in these unlawful activities in any part of the country.

Locally manufactured illicit/counterfeit/non-duty-paid cigarettes are produced by many companies situated in Khyber Pakhtunkhwa and AJ&K causing huge loss of revenue and creating serious health hazards, especially amongst the youth. Since these companies conceal/under-declare their production, excise related price increases of legal cigarettes widen the gap resulting in the boom of illicit cigarettes trade. The illicit cigarettes sell between price point of Rs. 30-45 per pack which is even lower than the Federal Excise Duty (FED) and sales tax payable per pack.

It is highly lamentable that after lapse of many years to fulfill its international obligation, Pakistan has failed to implement track and trace (T&T) system of tobacco products. The last bid by FBR was declared unlawful by Islamabad High Court (IHC) 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].   

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 ITTP 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 ITTP. The protocol stipulates that any tobacco T&T solution shall be independent of the tobacco industry. It is a fact that no regime showed seriousness in implementing T&T in Pakistan to counter ITTP, recoup revenue losses due to illicit/counterfeit cigarette production.

The Government of Pakistan Tehreek-i-Insaf (PTI) took the initiative but FBR committed fatal errors in awarding the contract as highlighted by the IHC in its above-referred judgement. Pakistan’s failure to implement T&T systems to curb illegal cigarette sales for the last many years gives credibility to the allegation that the mafias engaged in illicit cigarette trade have been enjoying the support of some corrupt officials and shady politicians.

The stricter monitoring of Green Leaf Threshing units (GLTs) is the main 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. It is strange that FBR with workforce of over 22,000 personnel cannot monitor just a few GLTs. How GLTs supply tobacco out of books and if this is happening, where is the enforceability? GLT season starts in August and peaks in September and mostly closes by start of November (totally closes in December). The monitoring needs to be done timely and as per chapter XVI of the Federal Excise Rules 2005 that exclusively deals with it to counter the nip the evil in the bud.

There is massive tax evasion by the companies engaged in illicit cigarette manufacturing of Rs.10 per kilogram (kg) of total tobacco volume purchased but not reported to Pakistan Tobacco Board (PTB) to avoid development cess. These companies allegedly do not pay even Rs. 300 per kg tax on packed tobacco after processing by GLTs that is adjustable against cigarette production as well as Rs.10 per kg levy on processed tobacco at GLT stage. 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 in the market, why is the total revenue so much lower? This needs probe by the concerned authorities.

Undoubtedly, there exists massive evasion of 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. A story appeared in the 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”. What happened to this is known to all—a complete hush-up!

It is pertinent to mention that Pakistan is among one of the largest consumers of tobacco in the world—at the end of 2019, around 26 million Pakistanis of 15 years and above were 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 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.

In budget 2020-21, no effort was made to levy health tax on cigarettes when the country was in dire need of funds to meet the Covid-19 challenge. For levying this tax, the Cabinet in 2019 tried but withdrew the proposal due to influence of mafias. The legislators have failed to take note of the fact that any provincial assembly, (in Khyber Pakhtunkhwa, PTI has two thirds majority and in Punjab and Baluchistan has 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 quality healthcare and to meet challenges like Covid-19 endemic. 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 helping the poor lacking resources to get even basic needs. The PTI Government should avail the opportunity and impose health tax through Finance Supplementary Bill after taking all the provinces on board.  

The existence of mafia-like operations of ITTP in Pakistan 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 ITTP in Pakistan destroying health of millions, especially the youth, but successive governments—federal and provincial—have been showing extreme apathy.


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

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