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Revenue losses & illicit tobacco trade

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

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, 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, Shabbar Zaidi, claimed that the contract was awarded to the lowest bidder as we were bound to follow the rules framed by Public Procurement Regulatory Authority (PPRA). The FBR has till today not contradicted the specific allegations of ITSA. However, Haider Bajwa, NRTC’s spokesperson said: “There is no ownership of Inexto shares directly or indirectly by any tobacco or tobacco-related companies”. According to him, “the whole process is designed to comply with the WHO FCTC”.

One bidder—SICPA, a Swiss company claims that it 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 other companies in the world that have never worked with the tobacco industry and are helping governments to implement T&T systems. The FBR did not impose a rider in the bidding that only those 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 etc have failed to play their role in ousting entities working for tobacco companies to participate in bidding process.

Pakistan singed FCTC in May 2004 and ratified it in the same year. It was thus bound to implement T&T to curb illegal cigarette sales, but failed to do so till today 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”. 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. 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 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 and Government of PTI must explain their position vis-à-vis alleged breach of FCTC Protocol. 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”. This allegation is serious and requires immediate attention of all concerned, especially the Prime Minister of Pakistan and his cabinet, particularly when an article published in the local newspaper on November 18, 2019 quoted Hamid Ateeq Sarwar, Member Inland Tax Policy and FBR’s official spokesman, admitting: “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”.

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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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