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The ‘track and trace’ evaders

Business

July 31, 2020

Tax evasion has always been an art and craft that criminals excel in. Those who are into any business are out for profits which can only be maximised through tax evasion. They always find ways to evade legal taxes that should go to the government. Illicit trade is rampant in all areas – from consumer goods to music and from restaurants to cigarettes.

Illicit trade in cigarettes has dented the economy in Pakistan in a big way. The demand for cigarettes grows every day and law enforcers are not equipped to tackle the issue. It has been estimated that the cost of tax evasion from illicit cigarettes was so severe in 2019-20 that revenue losses were estimated at Rs 70+ billion.

The tobacco industry in Pakistan has turned into a battleground between the legal, duty-paying formal cigarette sector and those who cheat. Illegal cigarettes account for nearly 37 percent of total consumption in Pakistan. The size of illicit cigarettes share is increasing by almost 6 percent in one year. There are multiple factors behind this increase. Data shows that annual cigarettes consumption at around 85 billion sticks. Consumption has not decreased and will not do so until illicit tobacco trade is not controlled.

One key factor is the price differential between legal product and nontax-paid cigarettes. Interestingly, according to a study conducted by Neilson, 86 percent of the brands produced by the local cigarette manufacturers are sold below the minimum selling price fixed by the government. These local companies are making money by taking the advantage of weak law enforcement policies in select regions. They are running their illicit business tactfully as they print prices on cigarette packs and in newspaper advertisement, which are fulfilling legal requirements but in fact the market survey unearthed at the retail level these brands were available at a lower price than the advertised prices, which was Rs35, Rs25, Rs30 and Rs20 respectively; which just goes to show the level of tax evasion taking place. Illicit trade and smuggling of tobacco products has now become a major concern. The Protocol to Eliminate Illicit Trade in Tobacco Products (ITP) requires a global tobacco track and trace system.

There have been previous attempts to implement a track and trace system but it was stopped. A Pakistani court cancelled a multi-million-dollar contract for the implementation of a tobacco track and trace system after two bidders complained that the winner was granted preferential treatment.

A track and trace system for tobacco products offers monitoring in real time and tracks the movement of tobacco products through all stages of the supply chain — from production or import sites to retail outlets. It also identifies where illicit activity has occurred. An effective tracking and tracing system for tobacco products should be able to ensure verification of the volume produced/imported; verification of the correct tax payment; tracking of the products through the supply chain; tracing of the products back to its source, and authentication of the shipped product.

An effective track and trace system should include packs with unique and secure markings, including codes or stamps that are affixed to packs and packages. These codes and stamps should track information such as the date and location of manufacture, the names, invoices, and order number, the intended retail point, and product description. In addition, an effective track and trace system also requires national record-keeping structures, and the transfer of data into an information-sharing database.

There are other hurdles in implementation of a track and trace system. According to World Health Organization (WHO) sources, the hurdles include weak governance, lack of a high-level of commitment, ineffective customs and excise administration, corruption and complicity of cigarette manufacturers and presence of informal sectors and unrecognized distribution channels. The people’s perceptions and their social economic status have also encouraged illicit trade in tobacco. According to WHO, the ability of administrations to effectively tackle illicit trade in many countries is hampered by lack of commitment at the highest level.

Pakistan has made considerable progress in tobacco control in recent years. However, the risk of deaths because of tobacco in the population continues to be high. People continue to become sick and the costs to society from tobacco continue to mount. This means that Pakistan can still do a lot more to adopt proven tobacco control tools for the people’s wellbeing.

In this regard, a Track and Trace system would be an essential component of a comprehensive approach to reduce or eliminate the illicit trade of tobacco products. The track and trace system would provide to a government authority real-time control on all production lines with real-time secured data transmission.

An elaborate and well-established cigarette supply chain is present in Pakistan. Cigarette-making itself is an elaborate process. Manufacturing and marketing of such a huge quantity of cigarettes (17.3 billion LTE - Local Tax-Evaded - cigarettes were produced in 2014) involves extensive operations involving buying and treatment of raw material and conversion into manufactured cigarette, storage facilities, and an extensive countrywide distribution network. The under-declaration of the tobacco crop, cigarette paper, and filter rods helps increasing the volume of cigarette manufactured because it ultimately assists in evasion of excise duty and sales tax on the cigarettes.

The Pakistan government, especially its revenue collection institution such as the FBR, should take a major initiative with regard to introducing an independent track and trace system under which stamps or other markings must be affixed on cigarette packs. The non-duty paid tobacco products that are sold in the market can then become easily distinguishable. This makes it relatively easier to initiate action against such products. —The writer is a PR practitioner