Tip of the tax loss iceberg

LAHORE: Over Rs40 billion estimated losses to exchequer by smuggled tobacco products is just tip of the iceberg compared to damage dealt by myriad of other contrabands coming into the country.

It is regrettable that no scientific evaluation has been done on losses caused by smuggling. Haroon Akhtar Khan the former adviser on revenue to Nawaz Sharif stated at Mir Khalilur Rehman Society seminar in 2015 that smuggled goods worth $9 billion are imported annually in Pakistan.

He said that this denies the government of Pakistan of revenues worth Rs300 billion. However at the same seminar Ramzan Bhatti a senior Federal Board of Revenue (FBR) official, who just retired, estimated that smuggled goods worth $15 to $20 billion enter Pakistani market annually.

The gentleman had remained an insider for three decades and his estimates carry weight. At this magnitude of smuggling the revenue pilferage should be from Rs500 to Rs700 billion in 2015. Whatever the actual magnitude at that time it is certain the quantum of smuggling has increased substantially.

The estimates about pilfered smuggled cigarettes are based on assumption. There are however many items the consumption of which is known and the smuggling could be evaluated after accounting for the local supplies and legal imports which give almost exact quantities of the smuggled goods in that sector.

Tyres are one smuggling prone items where the actual consumption of each size can be and have been calculated on the basis of different vehicles plying on our roads. The trye manufacturers can be counted on fingers and their total production is also documented. The legal imports of all sizes of tyres are also documented. The remaining demand of the sector is fulfilled by tyres that enter our markets illegally and without paying a penny to the exchequer.

A study by rating agency PACRA in 2019 revealed that Pakistani market needs 4.25 million passenger tyres annually. The domestic industry produces 1.19 million units and 3.06 million are either imported or smuggled. For light commercial vehicles the total demand is 4.48 million units out of which the domestic industry produces 362,000 units and balance 4.118 million are imported or smuggled. The total demand for truck and bus tyres (non-radial) is 3.905 million and local industry produces only 19,000 units leaving the balance 3.76 units for importers and smugglers. For tractors the annual requirement is 1.530 million, local production is 51,700 and 1.01 million market goes either to importers or smugglers.

The country also needs 3.5 million radial bus and truck tyres, none of which is currently being manufactured by our local manufacturers. The marketing is again in the hands of legal importers and smugglers.

Smuggling of tyres shows the penetration of smugglers in our economic set-up. Unlike cigarettes these are big items. It has been conceded numerous times by the FBR that there should be lower duties on smuggling prone items to deter smugglers. And they have kept the normal duties low.

However in order to reduce imports this government slapped regulatory duty (RD) on numerous items considered luxury goods. Before the imposition of RD the ratio of legal imports and smuggled truck and bus tyres the quantity of imports was equal now after RD the country last year legally imported 1.3 million bus and truck tyres and paid total government import duties of Rs17 billion. The quantity of smuggled tyres under this category was 2.262 million units.

Thus the smugglers evaded duty of around Rs26 billion. This evasion is for one category of tyres but the story is almost same in other categories as well. Tyre smugglers by some estimates deprive the exchequer of over Rs60 billion in revenues.

The legal importers have probably given up the hope of full curb on smuggling and instead of demanding lowering of sales tax and regular import duty, they are demanding withdrawal of regulatory duty only. Another problem faced by the tyre importers is that they have to obtain the quality certificate from Pakistan Standards and Quality Control Authority (PSQCA).

The certificate has to be obtained for each consignment even if the shipments are from the same manufacturer. It involves hefty testing fees, speed money for quick processing of testing procedures, and two tyres that are retained by the authority.

The importers have no issue with certification but simply demand testing of a manufacturer’s product should be valid for one year and not for each consignment many of which arrive in the same ship.

They rightly point out the futility of testing as bulks of the tyres enter the country through smuggling. They pay no taxes nor are they tested. The chances of substandard imports are more in smuggling than legal imports.