FBR signs track and trace deals with 22 tobacco firms amid legal hurdles

ISLAMABAD: The Federal Board of Revenue (FBR), the tax authority of Pakistan, has signed agreements with 22 tobacco manufacturers in the country to install the Track and Trace System (T&TS) at their factories, a move that aims to curb tax evasion and illicit trade in the tobacco sector.

The T&TS is a digital system that allows the FBR to monitor the production, distribution and sale of tobacco products through unique identification codes and stamps on each pack of cigarettes. The system is expected to increase the tax revenue from the tobacco sector, which contributes about 1.5 percent of the total tax collection in Pakistan.

The FBR had initiated the implementation of the T&TS two years ago during the tenure of the Pakistan Tehreek-e-Insaf (PTI) led government and initially two multinational companies, Pakistan Tobacco Company (PTC) and Philip Morris, signed agreements and made it operational.

Then Khyber Tobacco Company also struck a memorandum of understanding and implemented it in their facility.

Now the FBR has signed agreements with 18 more manufacturers. There is one factory located in Karachi that has also signed an agreement with the FBR but has not yet started its production.

So far, the FBR has signed agreements with all tobacco units that are registered with it.

It is estimated that there are 26 to 30 units in the country but some of them are either closed down or shifted to Azad Jammu and Kashmir or other parts.

However, the implementation of the T&TS has faced major challenges due to litigations filed by some tobacco manufacturers who do not want to see this initiative as a success.

These largely belong to illicit manufacturers with the intention to delay the implementation of the T&TS as much as possible.

These litigations started especially in Islamabad High Court and Peshawar High Court. Now all petitions against the implementation of the T&TS have been dismissed except one intra-court appeal filed by some tobacco manufacturers.

The implementation of the T&TS was also part of the structural benchmarks under the International Monetary Fund (IMF) agreement of the last Extended Fund Facility (EFF), which expired on June 30, 2023.

The deadline for implementing the T&TS for tobacco and other sectors such as cement, sugar and fertilizer was extended by several years. On the occasion of the completion of the sixth review in February 2022, it was pointed out that the T&TS was bound to be rolled out for the whole tobacco sector by the end of June 2021 and then extended up to October 2021.

However, given technical capacity issues, Pakistani authorities communicated to the IMF that they cannot commit to finalizing a full rollout of the T&TS to all companies within the program period and therefore requested to drop this structural benchmark.

The FBR high-ups claimed that the implementation of the T&TS will become operational after two months so all major players will have full-fledged installation of Track and Trace by October 2023. There is a need to avoid any further delays in implementing the T&TS if the FBR wants to achieve dividends of raising its revenues from the tobacco sector.

There is also a need to understand that the implementation of the T&TS is essential to trace the untaxed cigarettes provided if there is an enforcement mechanism fully placed to take stern actions against those who are selling cigarettes packs without stamps of Track and Trace.

But if there is no effective enforcement followed by installing the T&TS, it will be another failure on account of taking any substantial action against illicit cigarettes.