Inefficiency of Tax Authorities in Enforcing Tax Laws Major Reason for Low Tax-to-GDP Ratio  

The inefficiency of tax authorities in enforcing tax laws is a major reason for the low tax revenue in Pakistan’s GDP.

In the tobacco industry, there is widespread tax evasion, with 52 illicit manufacturers controlling 48 percent of the market share. Surprisingly, only 2 legal companies contribute 98 percent of the taxes collected from this sector. The upcoming threshing season provides an opportunity for the government to step up enforcement efforts.

The illegal sales of tax-evading cigarettes are seriously harming the economy and hindering the government’s attempts to control tobacco consumption.

To address tax evasion in the tobacco industry, several laws have been introduced, including SRO 1149 (I) / 2018 under the Federal Excise Act 2005. This regulation focuses on monitoring tobacco processing for cigarette manufacturing and preventing illegal sales.

The SRO not only applies to tobacco processing units in cigarette factories but also to self-consumption by cigarette companies and exporters. The Commissioner is authorized to appoint Inland Revenue officers at green leaf threshing plants to verify tax invoices and oversee the sale of processed tobacco.

Designated officers are required to maintain daily records of tobacco processing, quantities supplied to cigarette manufacturing units, storage, and applicable taxes. They must submit monthly reports to the Commissioner for reconciliation.

Furthermore, the transportation of processed tobacco is closely monitored, with vehicles mandated to carry copies of tax invoices from green leaf threshing units when delivering to cigarette factories.

Experts believe that if this SRO is diligently implemented, it could significantly reduce the annual loss of Rs. 240 billion to the national exchequer caused by the illicit sale of cigarettes.

However, the influence of individuals involved in manufacturing and selling illegal cigarettes presents a challenge to effective investigation and enforcement. Many manage to evade scrutiny by leveraging their connections and access to the legislature.

According to experts, it is easier to monitor a smaller number of tobacco processing units, which amount to less than a dozen, compared to overseeing 2,000,000 retailers across the country.

It is imperative to prioritize the national interest over personal and political interests; otherwise, these substantial tax leaks will continue to weaken Pakistan.

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