Tobacco Taxes – The introductory Revenue Goldmine

The government, already neck-deep in foreign debt and mired with economic woes, has reached deep into its pockets to scrape Rs144bn to supply to the poor and therefore the needy. As we still remain strained, Pakistan and therefore the nation is in desperate need of more funds.

The untaxed tobacco industry
Here’s where the hitherto untapped gold mine of revenue comes in – the untaxed industry. Recently there have been tons of dialogue around the incontrovertible fact that should the industry in Pakistan be taxed further, it might add more revenue. Whilst in theory and a perfect world this is able to be possible, this is often unlikely to be the case actually.

For example, multiple tax increases in the past 18 months we expected to usher in a further Rs 27billion in 2019-20 as compared to the previous year but have did not do so. In fact, the collection targets from the tobacco sector for 2019-20 are missed by an outsized margin and therefore the year is predicted to shut with revenues at the same levels as last year, if not lower.

Excessive increase in tax will have downwards effects
A few tax experts have highlighted that extreme tax increases could accelerate the taxpaying players’ downward spiral. This is predominantly thanks to non-taxpaying, cheaper alternatives readily, and abundantly available within the market. This could threaten the future sustainability of the government’s revenue stream that currently already stands at a healthy Rs110 to 115bn.

Non-tax paying tobacco mafia
It is also shocking to notice that 98% of the revenue collected from the world is being paid by two multinational cigarette manufacturing companies in Pakistan whereas other numerous companies working in Pakistan are paying bare minimum taxes. It goes without saying that majority of those remaining players don’t pay applicable duties and taxes.

Some of the brands being sold by these companies are available within the marketplace for as low as Rs 30 or Rs 40 – which is both illegal and well below the tax threshold set by the govt. They also don’t suit health warning requirements, use consumer promotions, and market to youth- all of which are serious concerns.

According to an estimate, the govt of Pakistan is being bereft of Rs45 to Rs 50bn per annum in taxes by this non-tax paying tobacco mafia. This mafia operates shrewdly; it’s a secret that they’re ready to influence representatives among the country’s legislature.

These tobacco manufacturers don’t adhere to rules and regulations of conducting business in Pakistan. In fact, a number of them have moved their factories to Azad Jammu and Kashmir to avoid scrutiny. They are guilty of smuggling, evading taxes, infringement of copyright, and underselling the merchandise among various other crimes.

Illicit trade of tobacco is a serious crime
This problem isn’t unique to Pakistan – the illegal cigarette trade forms a part of a broader illicit economy in South Africa and causes an identical loss in taxes. This involves counterfeit goods, automobiles, clothing and textiles, movies, and music. The revenue from this has also contributed to high-level corruption, party funding, and other criminal endeavors.

In other countries, illicit trade has been known to possess links to serious and arranged crime. According to a Guardian report, one among the terrorists involved within the attack on Charlie Hebdo had traded in counterfeit trainers and cigarettes.

Aside from the loss of state revenues, the illicit trade tobacco has negative effects on business and individuals’ health, posing a threat to the continued socio-economic development of the country. Combating this challenge not only has an economic and health benefit but also cripples a crucial source of funding for organized criminals.

Steps to control illicit trading
Addressing this problem requires a concerted effort by both enforcement and the Ministry of Health. First and foremost, the implementation of technologies like track-and-trace is another critical step that has been known to be one of the foremost effective deterrents to curb this menace. Alas, track, and trace plans for Pakistan keep getting delayed thanks to some issue or the opposite leaving the illicit players free and unhindered.

Whilst enforcement is additionally key, it’s understandable that Pakistan has limited resources and funds. There are many cost-effective ways of doing it. Firstly by enhancing effective information sharing between enforcement agencies and judicial authorities to market investigation and prosecution of cigarette trafficking. Secondly, these efforts should be targeted.

Current enforcement initiatives target the traders of illicit cigarettes. While arresting these individuals may send a message to the “big fish”, the very fact remains that they’re small-scale players within the criminal chain. As with other sorts of organized crime, they’re at rock bottom of the network and may easily get replaced by numerous other willing or needy individuals. There is definitely a requirement to focus on those that are above the chain.

Finally, stricter penalties must be introduced. Despite the massive profit generated from illicit cigarette trafficking, the penalties related to it are moderate compared to other crimes like financial fraud, drug or weapon trafficking. Introducing more stringent sentences for illicit cigarette trafficking (as within the case of medicine for instance) could function a deterrent for all across this massive countrywide value chain.

It would be worthwhile to incorporate seizing the assets of convicted offenders rather than merely confiscating the contraband. The stolen product must be destroyed publicly instead of being auctioned. This can send a robust message to those involved and stop any pilferage or circumvention of the legal process.

Pakistan should develop a regional strategy with other countries
Since illicit cigarette trafficking is additionally a cross-border issue, developing a regional strategy targeting the affected countries is vital . For Pakistan this suggests better cooperation with UAE, especially trade Zones like Jebel Ali also as better inspection along the Afghan Transit Trade Route.

Another route being exploited is that the Azad Jammu and Kashmir route. All of these have the potential to be misused to bring illicit products into the country. Additionally, some counterfeit that comes into the country is often traced back to China.

A trans-national strategy should be formulated to affect the matter like improved collaboration in terms of joint enforcement operations, intelligence sharing with these countries, and enhancement of legislation that aim at curbing the assembly and smuggling of illicit cigarettes.

This would enable a concerted effort from the region to tackle this growing form of organized crime. The government should act fast before this network increases its influence and size. It is time someone brings this racket under the tax net.

Author: Nadia Arshad, an SEO Content Writer

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