Pakistan’s demand for cigarette consumption is among the highest in the world. The size of the Pakistani market is a whopping 85-90 billion cigarette sticks per year. However, an interesting point to note is that the taxes generated from the tobacco industry are more than the number of sticks smoked by Pakistanis i.e. more than 1 rupee per cigarette.
According to a study of Competitive Commission of Pakistan (CCP) titled “Policy Note”, taxes on the tobacco industry are an important source of revenue for the government. In the year 2015-16, the tobacco industry generated Rs. 114.7 billion in sales tax and Federal Excise Duty (FED). Cigarettes alone constitute approximately 48 percent of all FED collections making it the single highest contributor.
However, the tax authority believes that the leakage in the tax collection system needs to be stopped by means of an effective track and trace system from the Federal Board of Revenue.
FBR’s track-and-trace system for tobacco products will help prevent leakage of revenue, under-reporting of production and sales, and ensure proper payment of Federal Excise Duty (FED) and Sales Tax on tobacco products.
The CCP has appreciated the track-and-trace system as an important step to curb illicit tobacco trade that places registered businesses at a competitive disadvantage. Nonetheless, the CCP has made recommendations to the FBR to address competition concerns in the tender.
The commission has asked the FBR to redesign the criteria to include points for assessing other vital elements of the track-and-trace system.
The RFP also required special handheld readers to check the products. However, today’s smartphones/tablets, with a camera and a secure reader application can achieve the same objective. The commission has asked the FBR to include the option of smartphones with a secure application as an acceptable solution.
The requirement that the successful bidder must ensure a minimum investment of US$ 7.5 million in Pakistan relating to the track-and-trace system within one year of signing the contract could exclude all international bidders without a current printing facility in Pakistan.
CCP has recommended to the FBR to amend the relevant clauses to include the necessary elements of the system that require investment in Pakistan. FBR may also, if it deems appropriate, provide suitable incentives for any Greenfield investment.
And finally, the requirement that the system’s complete implementation be completed in 22 weeks could limit the ability of firms to participate in the tender. CCP has suggested that the timeline may be extended appropriately to address the stakeholders’ concerns.
The consumption of cigarettes is approximately 4 billion packs annually therefore, the requirement of stamps for Pakistan ranges from 4-5 billion annually.
The requirement of 10 billion stamps excludes a majority of firms from the tender because globally only one firm meets the criteria based on the volume of business and the requirement is in excess of the expected total demand. This should be revised.
The commission is concerned that this stipulation precludes all international bidders without a current printing facility in Pakistan. Since, at present, there is only one security printing facility in Pakistan which is a JV between the Government of Pakistan and an international security printing company, other bidders would not be able to partner with this facility for production of stamps. Some parties have also expressed concerns over the quotation of a very specific amount of investment in the RFP which they believe has no basis and inhibits entry since it seems to favor a particular company.
The detailed policy note of CCP can be read here.