Tax evasion by illicit cigarette sector could reach Rs330bn in FY24

ISLAMABAD: The Federal Board of Revenue (FBR) has been unable to fully enforce an adjustable federal excise duty of Rs390 per kg on unprocessed tobacco at the level of green leaf threshing (GLT) units, losing a chance to curb illicit cigarette production and collect billions of rupees in taxes, industry officials said.

"The tax machinery again missed the opportunity to collect 390 rupees per kg advance FED, thus losing the chance to curb illicit cigarette manufacturing from the outset," an industry official said.

Pakistan has 11 GLT units, which buy tobacco leaves from farmers and process them for cigarette manufacturers. The FBR could have documented the entire sector by monitoring these units for two months in August and September, when most of the tobacco crop is harvested and sold, the official said.

According to industry estimates, Pakistan produced 65 to 72 million kg of tobacco leaf this season, of which two multinational companies, Pakistan Tobacco Company (PTC) and Philip Morris (PMI), bought 40 million kg, while the rest went to illicit cigarette makers and exporters.

The price of tobacco leaf soared by 325 to 400 percent in the domestic market during the buying season, as regulators failed to stop illegal purchases that distorted the market and made Pakistan's tobacco prices uncompetitive, the official said.

The price of tobacco leaf in Pakistan stood at $4.75 per kg, compared to $2.96 per kg in Bangladesh and $1.50 per kg in the Philippines. The price of tobacco leaf doubled to around Rs800 per kg. The FBR deputed monitoring teams at manufacturing facilities to assess the procured tobacco leaf at the GLT stage, and the Board collected around Rs16 billion through advance FED of Rs390 per kg, which is adjustable.

"But it did not account for the remaining unprocessed tobacco, which is assumed to have been used by illicit manufacturers who did not pay any taxes," the official said.

The FBR's losses would multiply when the tobacco leaf is used to produce billions of cigarettes, he said, adding that the total tax evasion by the illicit cigarette sector could reach up to Rs330 billion for the fiscal year 2023-24.

"All of these losses could be reduced or eliminated if the Rs390 rupees per kg advance tax on unprocessed tobacco at the GLT stage could be collected by documenting the sector from the start of a few dozen GLT units," the offcial said.

Another industry source said that a GLT unit has been set up in Azad Jammu and Kashmir (AJK), a semi-autonomous region that is not under the FBR's jurisdiction, and that a large quantity of tobacco leaf has been transported from Khyber Pakhtunkhwa province to AJK for cigarette production.

Under an FBR notification, GLT plants cannot sell unmanufactured tobacco to anyone who is not on the active taxpayer list. The notification also authorizes the FBR to appoint an Inland Revenue Officer to oversee GLT plants, which allows the FBR to monitor and verify tax receipts, as well as tobacco processing, storage, waste, and sale to non-manufacturers.

However, the FBR has not implemented this notification effectively, the source said, allowing the illicit cigarette sector to flourish at the expense of the legal industry and the national exchequer.