Tax Evasion in the Tobacco Sector Continues as FBR Fails to Implement GLT Monitoring

One of the main reasons for the low proportion of taxes in Pakistan’s GDP is the failure of tax authorities to implement tax laws.

The top tax-evading sectors include the cigarette industry, in which two companies, despite having 60 percent market share, account for 98 percent of the total taxes collected from the sector.

The tobacco sector is plagued with sales of tax-evading illegal cigarettes right under the nose of authorities. This is not only denting the economy but nullifying the government’s efforts of tobacco control.

There are several laws to counter tax evasion in the tobacco sector, but their implementation in true spirit is yet to be seen.

One of these measures includes SRO 1149 (I) / 2018, issued by FBR, under the Federal Excise Act 2005, which mandates monitoring the processing of tobacco for manufacturing of cigarettes and illegal sale of processed tobacco.

The SRO applies to tobacco processing units for cigarette factories and to the self-consumption of cigarette companies and exporters.

Under the SRO, it has been directed to commence mandatory monitoring at green leaf threshing (GLT) plants by appointing officers who will be responsible for verifying the tax invoice as well as overseeing the sale of processed tobacco, recording the amount of waste tobacco, their own use or transfer to manufacturers and storage.

Green Leaf Threshing Plants are bound to provide work and accommodation for FBR-designated officers to perform their duties.

The designated officers will compile a daily record of the amount of tobacco that arrived for processing, the quantity of processed tobacco, the quantity supplied to the cigarette manufacturing units, storage, and determine applicable taxes. The officers will send their compiled report to the Commissioner on a monthly basis so that it can be reconciled with the monthly statements.

It also monitors the delivery of processed tobacco. For this purpose, it has been made mandatory for vehicles delivering processed tobacco to cigarette factories to carry copies of tax invoices of green leaf threshing units.

Experts believe that if this SRO is implemented effectively in good faith, the annual loss of Rs. 75-80 billion to the national exchequer from the illicit sale of cigarettes can be significantly reduced.

A team of federal tax ombudsman has recently identified the poor supervision and alleged maladministration by FBR field officers for heavy tax evasion at the green leaf threshing level.

The FBR’s own estimate shows a worrying difference between tobacco cultivation statistics and the amount of tobacco used to make cigarettes.

According to FBR records, 106.780 million kilograms of tobacco were produced in 2017-18, while cigarette companies reported 44.20 million kilograms of tobacco use.

In the year 2018-19, out of 111.63 million kg of tobacco, cigarette makers showed consumption of 63.63 million kg of tobacco.

In this FBR review, poor supervision at the level of green leaf threshing alone was blamed for the loss of Rs. 40 billion to the national exchequer in two years.

The political influence of those involved in the manufacture and sale of illegal cigarettes in Pakistan is no secret. These elements, who damage the national treasury through illicit trade, use the cover of their affiliations and access to the legislature.

Many of these individuals have been under investigation, but most have managed to use political influence to freeze the investigation against them. A similar case is that of SRO 96 (1) / 2021, whereby, FBR was to set up special check posts where taxable goods manufactured in tax-exempted areas (AJK) will be monitored and only allowed to enter with registration and tax payment. However, enforcement on this front is also yet to be seen.

According to experts, it is easier to monitor tobacco processing units, which number less than a dozen, that too for only 3 months, than to monitor 2,000,000 retailers across the country throughout the year.

With the help of technology and digitization, the FBR’s SRO can be applied in its true spirit, but it requires political will.

We must prioritize the national interest over the interests of personal and political interests. Otherwise, these heavy leakages of taxes will continue to weaken Pakistan.