Track, trace, enforce

Pakistan has been plagued by multiple issues for decades which severely impact its growth progress. Low tax-to-GDP ratio, potential revenue loss due to inconsistent policies, and rampant tax evasion have been the talk of all governments – and yet little has changed.

Automation is seen as the panacea for all these problems. New software and tools are introduced by the FBR every year, but the tax-to-GDP ratio still only hovers around 10 per cent, much less than the recommended 15 per cent ratio by the World Bank.

One tool the FBR has introduced for effective excise tax collection is the Track and Trace System (TTS). Like all other automation measures, this system also promises to stop tax evasion in multiple sectors such as cement, sugar, tobacco, fertilizer and, most recently, tiles. As per the FBR, the TTS was introduced on July 1, 2021 to enhance tax revenues, reduce counterfeiting and prevent smuggling of goods.

Two and a half years later, however, the implementation progress of the system has remained dismal. The cement sector has undergone a trial of the system and has been given a deadline of April this year to fully implement it. Only two companies out of around 40 in the tobacco sector have fully implemented the system. One has partially implemented it and six are manually applying the tax stamps. The entire sugar sector has adopted the manual application of the stamps. This goes to show the challenges our system poses to ill-planned technological advancements.

The manual application of the tax stamps by companies shows that the TTS was outsourced with little research on the technological differences in the various sectors as well as between the companies operating within those sectors and a one-size-fits-all approach was applied.

In the case of automated tax stamps also, the efficiency of application varies for each industry. For example, in the case of the fertilizer industry, it is said to be around 85-90 per cent. That means that for every 100 bags of fertilizer, 10 to 15 bags shall be loaded onto trucks without the requisite tax stamps unless tax stamps are manually pasted on them.

Another issue that pertains to the tobacco sector in particular is the coverage area of the tax stamps as many cigarettes sold without duties come from tobacco companies that operate in Azad Jammu and Kashmir (AJK) to which the FBR’s jurisdiction does not apply. Although an MOU has been signed between the tax authorities of Pakistan and AJK, progress is yet to be made.

With delayed implementation, manual application, systematic inefficiency and coverage problems, the TTS may turn out to be merely a tick-box exercise a few years down the line to appease the structural benchmarks set by the IMF. The Track and Trace licensee does claim an increase in revenue after the implementation of the system in the sugar and tobacco industry, however, establishing the attribution of the revenue increase to tax stamps is so far quite difficult.

In the case of the tobacco sector for example the licensee refers to an article that states that in the first half of the fiscal year, the revenue collection increased by 26 per cent due to the implementation of the system. However, the same article to which the licensee refers states that “the revenue growth is mainly because of two factors – the cigarette prices were increased besides a substantial increase in the Federal Excise Duty rates in the last budget”.

The tobacco sector's case shows that even before the introduction of such an automated system, enforcement could have helped curtail all forms of illegal trade. All cigarette packs in Pakistan – whether produced locally or imported – must have the prescribed health warning and price printed on them as per the mandated regulations of Pakistan. Smuggled packs which have been rampantly available over the years are easily identifiable. Similarly, since duty-evaded cigarettes sell at a price below the legally mandated price, they too could be identified at the retail stage with ease and traced back to the companies. However, until enforcement is carried out on the part of the government, regardless of the adoption of new technologies, progress cannot be made.

While the TTS has been partially implemented in the tobacco industry, it is still through raids and coercive tactics that tax evasion is being curtailed rather than an effective data-driven approach. Most recently, cigarette factories that were selling counterfeit and tax-evaded cigarette packs were raided and sealed in Islamabad and Multan. A step change in enforcement is required further at the retail level to ensure any pack without a tax stamp is confiscated.

There is no denying that we should move towards the adoption of modern technologies for effective tax collection and prevention of evasion but what we must understand is that these technologies are mere tools that need to be implemented while keeping in view the unique demands of industries, across all companies, in all jurisdictions and backed with strong enforcement. Otherwise, whatever technologies – like the track and trace system – we adopt shall become unsuccessful exercises that lose importance and impact over time.

The writer is a former officer of the

Inland Revenue Service and a

development professional.