All obstacles in the way of tough enforcement action against the manufacturers of illicit cigarette have fallen away after the Islamabad High Court dismissing multiple challenges to the legality of taxation on the cigarette industry and enforcement of the Track & Trace System (TTS), but do the authorities have the will to follow through with enforcement action?
At stake are not just billions of rupees in tax collection and the legitimate interests of the taxpaying tobacco industry. Also at stake are the supremacy of law of the land, and the sanctity of the writ of state.
The question, however, is: Do the authorities have the will to enforce the law evenhandedly and with full force?
The jury is out on the question because the tobacco black market wields considerable influence in the corridors of power. Some of the tobacco barons who made their fortunes by dodging taxes and preying on the legitimate industry have tentacles reaching deep inside government and bureaucracy.
Small wonder, then, that this powerful lobby was hiding behind spurious questions of legitimacy, questioning the state’s authority to tax them in the first place. That, however, is now history.
In a recent development that went largely unnoticed, the Islamabad High Court (IHC) threw out the last remaining challenges to the legality of taxation on the cigarette industry and enforcement of the Track & Trace System (TTS). Earlier, the Peshawar High Court threw out a sheaf of stay orders on the implementation of the TTS.
The FBR’s vaunted Track & Trace System was put in place across the tobacco, cement, sugar and fertilizer sectors from July 1, 2021 in Pakistan with a view to enhancing tax revenue, reducing counterfeiting and preventing the smuggling of illicit goods.
It consists in the implementation of a robust, nationwide, electronic monitoring system of production volumes and by the affixation of more than 5 billion tax stamps on various products at the production stage, which will enable FBR to track the goods throughout the supply chain.
With the removal of all legal hitches, now the ball is in the court of the FBR that how it proceeds ahead and demonstrates its will to implement the TS across the board on all stakeholders of this sector.
Pakistan’s tobacco sector is dominated by two giant corporations with international affiliations.
Between them, the Pakistan Tobacco Company and Philip Morris Pakistan contribute 98 percent of the sector’s revenue, the remaining 2 percent coming from all the remaining cigarette manufacturers together.
This is clearly out of step with the substantial market share of these tax-dodging manufacturers. In particular, their market share has exploded since the 154 percent federal excise duty hike through a mini budget this February. Latest estimates suggest that their market share has grown above 40 percent.
Recent data of multinational giant Pakistan Tobacco Company shows that the sales of the taxpaying industry have dropped massively since the minibudget. In March 2023, the sales of the legitimate sector stood at 1.84 billion sticks as opposed to 4.84 billion sticks in January.
Data also bears out that a large part of this market share lost by the legitimate industry went to tax dodging manufacturers, their sales going from 2.85 billion sticks in January 2023 to 4.8 billion sticks in March 2023. This translates to a shift of some 3 billion sticks from the legitimate sector to the black market, leaving a large hole in the government’s revenue collection.
This is an ill omen, especially at a time when the International Monetary Fund (IMF) has revised upward the FBR’s tax collection target for the current fiscal year to Rs 7,640 billion.
The legitimate tobacco industry is also under attack from another quarter of the black market: Smugglers sneaking foreign manufactured cigarettes into the country through airports and border crossings.
Just like the cigarettes manufactured by tax-dodging manufacturers, smuggled cigarettes are ubiquitously available and considerably cheaper than the legitimate brands, subject to heavy taxation.
As would be expected, sales of both these categories are shooting higher and higher since the mini budget. In March alone, smuggled cigarettes scored a 30 percent increase in sales. In fact, the tobacco black market has become so lucrative that more than 100 new foreign brands have flooded the market.
Apart from avoiding taxation, smuggled cigarette brands do not conform to Pakistani packaging standards for tobacco products, and display no graphic health warning.
The worst part is that smuggled cigarettes as cigarettes turned out by tax dodging units sell everywhere with impunity in sheer disregard of all regulations set by the Government of Pakistan. The wholesalers and retailers dipping their fingers in this dirty trade have no fear of being caught, seized, or even penalized. Since the mini budget, the minimum retail price of Tier-1 cigarettes has gone up from Rs 130 to Rs 330 per 20-pack, while the minimum retail price for tier-2 cigarettes has risen from Rs 41 per pack to Rs 101 per pack.
On the other hand, illicit cigarettes are selling at much less than these prices, practically edging the legitimate brands out of the market. It is a wonder that all these retail outlets and wholesale concerns spinning money for the black market have no fear of punitive action whatsoever.
The FBR has established the Inland Revenue Enforcement Network (IREN) for the purpose of taking stern action against such traders and ensuring enforcement action against illicit cigarettes.
In any case, the IHC ruling has paved the way for the enforcement of TTS nationwide once and for all and without any exception for all players. Simultaneously, the FBR will have to ensure compliance against all those who are manufacturing, marketing, distributing, and retailing illicit cigarettes.
Without effective enforcement, the implementation of the TTS will yield no positive results. The move can only have an effect once the FBR utilizes the TTS by ensuring effective enforcement on the ground and apprehending all those who are flouting tax laws for maximizing personal profits.
The government will have to implement TTS across the board on all stakeholders as its first priority.
There is also a need to place an effective monitoring and vigilance system at entry and exit points at Azad Jammu and Kashmir (AJK) as it is well known that several illicit manufacturers have moved their units to the AJK with a view to evading taxes.
Cigarettes produced at these units are transported into settled areas of the country, causing huge losses to the national exchequer. Under the circumstances, deployment of physical force equipped with the latest technology at all entry and exit points with the AJK is the only solution.
Finally, the FBR will have to strengthen its workforce to check TTS stamps at distribution and wholesaler levels. Otherwise, the trade in illicit cigarettes will continue unabated and the government’s dream of maximizing tax collection will remain unrealized.