Tax evading political tobacco mafia ensconced in PTI

KARACHI: Illegally priced cigarettes are being openly sold across the country flouting government restrictions. Officially, the lowest cost of a pack of cigarettes is Rs62.76ps from which the tobacco companies are bound to pay Rs42.11ps tax, but instead the cigarettes are being illegally sold for Rs30-40 per packet. The Geo News show ‘Aaj Shahzeb Khanzada Key Sath’ produced an investigative report over the issue.

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The report surveys markets of Karachi, Lahore and Peshawar where cigarettes are being sold at cheaper rates. In Karachi, Wajid Baloch showed several shops in Karachi where the cigarette is being sold for Rs30-40 per packet despite the printed price of Rs62.76ps on the packet. At many other places cigarettes were being sold at the last year’s price. This is despite the restriction that the cigarette companies are bound to sell their brands at new price with the warning message. But this binding is being openly flouted.

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Geo’s Peshawar’s correspondent Rizwan identified various markets in the city where cigarette was being sold at rates cheaper than those printed on the packets. He also interviewed several shopkeepers selling those brands. Similarly, Lahore’s correspondent Jawad Malik also showed violation of cigarette price fixed by the government. He also identified several spots and interviewed the shopkeepers involved in this illegality.

Shahzeb Khanzada said under the law the price fixed for 1,000 cigarettes of the expensive brands is Rs 5,960 which comes to Rs5.96 for a single cigarette. According to this formula, a 20 cigarette packet must sell for Rs119 which will have a duty of Rs104. Now 1,000 cigarettes of this brand would have to pay a duty of Rs5,200 which comes to Rs5.20ps per cigarette.

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Meanwhile, 1000 cigarettes selling for “less than” Rs5,960 would be considered the cheaper varieties. This way 20 packet cigarette selling for “less than” Rs119 would fall in the cheaper category. In the cheaper category, the companies are bound to pay Rs1,650 as duty for 1,000 cigarette, which comes to a duty of Rs1.65 for a single cigarette and a tax of Rs33 duty would be paid on a 20 cigarette packet.

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The government has already fixed the minimum price of cigarette. Under the law, cost of any cigarette brand inclusive of sales tax would not be less than 45 per cent of the retail price mentioned in column 2. According to column 2 the cost of the expensive brands comes to Rs119 per 20 cigarette packet. The tax of Rs53.64ps forms its 45 per cent of that amount. Besides 17 per cent sales tax is also imposed on a packet which comes to Rs9.12 tax per packet. The cigarette companies under this formula have to pay a duty of Rs33 per packet and Rs9.12 as tax.

Any cheaper brand cannot be sold for less than Rs62. 76ps under the law. However, ‘Aaj Shahzeb Khanzada key Sath’ established that cigarette packets are being sold for Rs30-40 in violation of the law.

The programme ran the prime minister’s interview saying two cigarette companies are paying 98 per cent tax, while the remaining pay only two per cent. However, the investigations by the programme establishes companies selling cigarettes at rates less than those fixed by the government indicating tax evasion. These companies are owned by influential politicians who are always close to the governments. Some of the political owners of the cigarette companies are also part of the current government.

A KPK senator and minister of the provincial cabinet runs a company selling seven brands of cigarettes that are selling for Rs40 per packet against the fixed price. These seven brands have a two per cent hold over the entire market. Others affiliated with this business include senators of the opposition political parties, members of the senate standing committee and law enforcement officials all of whom influence the government. Initially the PTI government tried to bring cigarette companies under the tax net but soon it had to withdraw when the important political forces exercised their influence.

According to an estimate, country produces 70 million tonnes of tobacco. The formal sector purchases 43 million tonnes of the produce. The remaining 27 million tonnes also ends up as cigarettes which are sold in the market but this “never shows in the papers” as it goes into evading massive tax. This benefits certain mafias who sell cheaper cigarettes again to rob the national kitty.

During the programme, Khanzada said in the PTI’s mini budget of Sept 2018, the government imposed Rs 300 tax on a kilo of tobacco to off set tax evasion. There are a number of cigarette companies across the country and many are working under the law and follow the regulations and pay tax. Such companies never objected to Rs300 as levy on a kg of tobacco since it is a withholding tax. On the other hand, those evading tax never inform about their sales as that would invite paying tax.

The PTI government imposed Rs300 per kg tax on tobacoo processed by the Green Leaf Threshing Plant. There are thousands of tobacco farmers across the country but only dozens of cigarette manufacturers and only 10 companies process their tobacco with the Green Leaf Threshing Plant.

The tobacco for the cigarettes needs to be processed through Green Leaf Threshing Plant which tells the government of the amount of tobacco acquired by a company and the number of cigarettes produced by them. This also reflects their market sales and the amount of tax paid, making tax evasion difficult. It was expected that this would prevent tax evasion by the cigarette manufacturers and would bring Rs30-35 billion to the national exchequer as tax.

But the cigarette mafia found an ingenious way by involving politicians who employed their influence for the unlawful sales. On June 13, a committee met under the speaker NA which was attended by MPs from the KP and the national assembly as well as ministers of KP cabinet. It was also attended by FBR chairman Shabbar Zaidi and Minister for Revenue Hammad Azhar. They demanded the FBR to offer concessions to the tobacco farmers since thousands of households are dependent on the crop using a ploy as if the tax would be paid by the farmers though it was made clear at the time of budget that the tax was meant for the cigarette manufacturers. However, the political pressure was so intense that the State Minister for Revenue Hammad Azhar reduced the tax from Rs300 to Rs10.

Khanzada wraps the programme by underlining the fact that if the PTI government had stuck to its guns and had brought all the illegal cigarette manufacturers into tax net it would have brought Rs35 billion to the government coffers. But the government could not withstand the pressure and now the prime minister laments that the tobacco sector evades taxes.