Illicit cigarette trade

“Only two [tobacco] companies pay 98 percent of total tax [tobacco collection]. The remaining 40 percent companies pay [a] meagre two percent tax” – Prime Minister Imran Khan

“Cigarette manufacturers across the country are evading millions of rupees in taxes through fraudulent methods in connivance with government officials, opposition members, and individuals of investigative agencies.” – Investigative report aired by Geo News on Aaj Shahzeb Khanzada Kay Sath

The speakers and participants at the ‘Breakfast with Jang’ session on ‘tax evasion and illicit tobacco trade in Pakistan’, held in Lahore on March 26, 2021, agreed on one thing that a crackdown on illicit cigarette trade is essential to save the millions hooked on smoking and to ensure that the state gets due taxes as losses are colossal because of unabated smuggling, counterfeit and non-duty paid production and its distribution.

The details of the event are already covered in a story published in The News on March 27, 2021. All over the world, the consensus is that the most effective way to reduce tobacco use is to raise the price of tobacco products through tax increases and ensure that the tax increases are reflected in prices. In Pakistan, we have been seeing the opposite as highlighted in the session that “more than 200 local illicit cigarette brands are selling at Rs20 to 40 whereas minimum tax per pack is Rs42.12 and minimum price is Rs62.76. These minimum tax and minimum price law violations compromise government’s fiscal objectives and the public health agenda”.

In a paper, ‘Tobacco Taxes in Pakistan’ (2013) jointly written by Shahid Javed Burki, Aisha G Pasha, Hafiz A. Pasha, Rijo John, Prabhat Jha, Aftab Anwar Baloch, Ghulam Nabi Kamboh, Rajeev Cherukupalli, Frank J Chaloupka, it was recommended: “Strengthen tobacco tax administration, increase enforcement, and tax duty free sales of tobacco products in order to reduce tax evasion and avoidance and earmark tobacco tax revenues for health purposes, including health promotion and tobacco control”. It is obvious that successive governments have not paid any heed to it and other recommendations made in this and many other papers and articles.

In recent days, the FBR issued press releases saying that it had started a crackdown on the illicit cigarette and other tobacco products “under the vision and commands of [the] prime minister”. In other words, they admitted that it was not their duty now or in the past but the “command of the prime minister”! This attitude itself shows how lax our agencies were to in countering this menace and taking defaulters to task who are playing with the health of citizens.

Pakistan is among one of the largest consumers of tobacco in the world – at the end of 2020, around 28 million Pakistanis of 15 years and above were smokers. Millions of young people (the future of Pakistan) are being hooked on narcotics abuse through cigarettes, other hazardous products leading to deaths of thousands every year from tobacco related diseases – the majority of these from lung and other cancers, strokes, ischemic heart, other cardiovascular and respiratory diseases.

In the face of this reality, the merchants of death are present even in elected houses, shamelessly intimidating the FBR and other law-enforcement agencies of dire consequences if they are touched. This rampant illicit trade is not possible without political patronage and control of the law-enforcement agencies through money power.

The legitimate question is how twice the FBR awarded a contract for licence of a track and trace (T&T) system of tobacco products by not following the rules. The first one was in violation of the World Health Organisation’s Framework Convention on Tobacco Control (WHO FCTC) Protocol, which sets out a clear strategy for the implementation of comprehensive, industry-independent T&T systems for tobacco. The then chairman of the FBR claimed that the contract was awarded to the lowest bidder and as per rules. However, the Islamabad High Court declared it unlawful with the directions that “the FBR is at liberty to initiate a fresh bidding process strictly in accordance with the law” [details can be seen in the order National Institutional Facilitation Technologies (Pvt.) Limited v Federal Board of Revenue and others available on the website of the IHC].

The second one of Rs25 billion was suspended by the Sindh High Court on a writ petition on March 13, 2021. The court has issued notices to the FBR and the federal government, fixing the case hearing for April 5, 2021. The prime minister showed annoyance but did not fix responsibility for irregularities committed twice by the FBR. Is it lack of capacity or was it a deliberate act? Many eyebrows are raised. In both the cases, the concerned were not sacked, and no inquiry was conducted to unveil the forces behind it. It was alleged in the media that one official of the FBR was transferred from Peshawar to Quetta for raiding a factory producing counterfeit cigarettes. The factory owner accused the FBR of blackmailing him.

On September 25, 2020, there was a protest in Islamabad by civil society and lawyers joining hands with residents of Muzaffarabad and other parts of Azad Jammu & Kashmir (AJ&K) against production/sale of counterfeit cigarettes, with serious health implications and causing revenue loss of billions of rupees to the Department of Inland Revenue (AJ&K) and the FBR.

The solution is proper monitoring of Green Leaf Threshing units (GLTs) – the main link in supply chain of 75,000 plus farmers, 500,000 plus retailers and 45 plus manufacturers. Only 11 GLTs are supplying raw material to cigarette manufacturers. It is strange that the FBR with its huge workforce cannot monitor just a few GLTs as per chapter XVI of the Federal Excise Rules 2005.

Pakistan signed the FCTC in May 2004 and ratified it in the same year. After a lapse of over 16 years, it has still failed to implement T&T to curb illicit cigarette trade. According to one estimate, Pakistan’s revenue loss from illicit cigarette trade has now increased to more than Rs80 billion per annum from Rs27 billion in 2012.

The writer is an advocate of the Supreme Court and adjunct faculty at LUMS.

Email: ikram@huzaimaikram.com

Twitter: @drikramulhaq