Pakistan’s Tobacco Industry Continued to Evade Taxes in FY 2021

Pakistan’s tobacco sector paid Rs. 18 billion more in taxes in FY 2021 compared with last year.

Tobacco companies paid Rs. 135 billion in taxes in FY 2021, the Federal Bureau of Revenue (FBR) said.

It is pertinent to mention that two companies who bought around 71% of the tobacco crop (33 million Kg out of 45.6 million Kg) in 2020, contributed to 98% of the tax while 48 companies who bought 29% only contributed the remaining 2%.

According to IPSOS, an international economic and industrial research organization, taxes worth Rs. 80 billion are being evaded annually from the tobacco sector in Pakistan.

According to tax experts, the actual tax collection from the tobacco sector could be increased by Rs. 80 billion by levying tax according to the actual production and sales figures of all 52 cigarette manufacturing companies in Pakistan.

The loss in tax revenue can be mitigated by taxing according to tobacco companies’ production and sales figures, analysts say. This can be done by monitoring production and sales using a track and trace system.

In 2020, during federal budget discussions, the sector suggested taxing tobacco threshing instead of cigarette sales.

Every season, the total tobacco crop purchased by manufacturers is processed using ten green leaf threshing units. Analysts believe that tax evasion can be cut down significantly if tobacco is be taxed at this stage. This is because the monitoring of threshing units is simpler than tracking final production and sales.

A monitoring system for tobacco threshing is already in place. It appoints an inland revenue officer to supervise threshing units and mandates that plants submit daily operational statistics.

However, the government’s prior efforts to raise the taxation of tobacco threshing failed when faced with resistance from parts of the industry.

In the federal budget 2021-22, the government has set a $155 billion tax revenue target for the tobacco sector.

In 2021, tobacco companies are expected to purchase 56.485 million kg of tobacco this year. The country’s two top manufacturers are projected to buy 71.5 percent of this amount, while the rest will purchase the remaining 28.5 percent.