Tax evasion in tobacco industry

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VIASYED SHAFIQ HUSSAIN
SOURCEBusiness Recorder
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Steal a little and they’ll put you in jail, steal a lot and they’ll make you king. This famous English proverb is so true when it comes to Pakistan. Illicit trade in tobacco is considered the most lucrative money making business in Pakistan due to evasion of high tax incidence and violation of tobacco control laws by domestic illicit cigarette manufacturers.

There is an estimated annual loss of over Rs 44 billion to the national exchequer due to tax evasion in tobacco industry but successive governments seem to have been playing in the hands of illicit operators.

Also Read: Tobacco growers demand abolition of new tax

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Tobacco leaf is one of the major raw-material in the manufacture of cigarettes. It is a documented fact by Chairman Pakistan Tobacco Board that 40% of leaf purchases in Pakistan are undocumented – implying that this undocumented leaf is being consumed in the manufacturing of illegal cigarettes. As a corrective measure, during the September mini-budget, the FBR imposed an adjustable tax of PKR 300 on green leaf processing. This simply means that cigarette manufacturers pay advance excise duty on leaf processing which can subsequently be adjusted against the sale of cigarettes – the same process that all businesses in Pakistan (including the export sector) follow under the input tax regime of the Sales Tax Act 1990.

Supply chain controls is one of the most effective measure to combat illicit trade and of course it hit the spot and created panic amongst illicit cigarette manufacturers. What we witnessed was an orchestrated and coordinated opposition to this levy by ‘illicit’ manufacturers raising absurd issues such as negative impact on exports. If one was to look into the details of publically available leaf export data over 80% of leaf export is done by the two legitimate multinational tobacco companies.

The remainder of the leaf export accounts for a mere US$ 5 million while the tax evasion under the garb of undocumented leaf is in excess of US$ 300 million! Does it make any sense to do away with the said levy and jeopardize US$ 300 million to supposedly protect the export of US$ 5 million? Again this would be malicious to suggest that the levy will have any negative impact on exports since this levy is adjustable/refundable.

This levy rather than hurting tobacco farmers will in fact benefit them since this will discourage the undocumented and illegal purchase of tobacco. It is a known fact that the farmers are exploited by ‘illicit’ manufacturers who purchase leaf without following the due legal process and delay their payments.

Legal purchase of leaf will protect farmers and also create more opportunity for farmers to work with legal cigarette manufactures thus giving the protection to the farmers available to them under the PTB laws.

There have been supporting voices from National Assembly as well as Senate of Pakistan to put pressure on the government to withdraw this tax. It is about time the government started a serious crackdown on these ‘illicit’ traders and throw them out of the party and the government to come clean in the public otherwise PTI wouldn’t be able to defend the high moral ground which they claim as their most distinctive characteristic.

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Pakistan’s tobacco industry is characterized by legitimate versus illicit manufacturers. Legitimate tobacco industry is compliant with all the tax and health laws whereas illicit industry seems to be completely disregarding all the relevant laws thus compromising level playing field for the legitimate industry. Although Prime Minister Imran Khan in his 100 days’ performance speech categorically mentioned that 98% of the tax is given by two legit companies with a marker share of 60% only whereas the 40% market share companies are contributing 2% in taxes. However, only speech is not enough, actions should speak louder than words. In this case the local manufacturers not only continue to blatantly violate tobacco control laws but also seems to be influencing the policymaking processes and creating hurdles for enforcement agencies to continue with their plunder of the national exchequer.

(The views expressed in this article are not necessarily those of the newspaper) 

(This news/article originally appeared in Business Recorder on May 15th, 2019)

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