Initiative – Behtr Pakistan

INTRODUCTION

Is it Time for a national tax emergency?

Pakistan is journeying through a critical phase of its national existence vying for its economic sovereignty. Today, our country finds itself trapped in the whirlpool of loans, bank borrowings, mounting inflation and spiraling circular debt. Add to that Pakistan’s social agenda that is held captive in the shackles of debt servicing – all in an environment where tax evasion is rampant. On the other hand, with a growing population now estimated at 220 million plus- the government struggles to provide adequate basic services such as mega projects or new infrastructure for the social and economic uplift of its people. Adding to Pakistan’s economic dilemma is the fact that it has one of the lowest taxes to GDP ratio amongst the developing countries. This summarizes a situation that can be perhaps best described as a time for a “state of emergency on tax collection”. Because Tax is powerful. Tax is Empowerment. Tax is hand in glove with both good governance and democracy alike. The tax base and tax collection of a country is what leads the nation towards dependency or its independence. In popular parlance, “economically dependent cannot be politically independent”.

Role of taxation in nation building

The link between taxation and development is fundamental. It is often assumed that tax is a bad thing and the government wants to deprive citizens of their hard-earned money. But from an economic, justice and human rights perspective taxes are crucial for three reasons:

Revenue: funding to deliver the services citizens need.
Redistribution: to address poverty and inequality.
Representation: building accountability of governments to citizens and reclaiming policy space.

A functioning state that can meet the basic needs of its citizens must rely ultimately on its own revenues to meet development objectives. Using the tax system, the state mobilizes domestic resources, redistributes wealth and provides social development, essential services and infrastructure. Effective tax structures can also create incentives to improve governance, strengthening channels of political representation and reducing corruption. Tax is fundamental to both social development and progress. However, unfortunately, owing to rampant corruption, oversight in the implementation of law – tax dodging and tax evasion has caused a blow to Pakistan’s fragile economy and added to its economic woes. Our country at current takes a direct hit of more than Rs.70+ billion every year due to the illicit cigarette trade that can be otherwise used elsewhere such as towards education, employment, social development and vital public services like health care, providing power to remote areas and building new roads.

In view of the above scenario, an initiative under the banner of “Behtr Pakistan” has started. This nationwide public service, national-interest initiative aspires to advocate tax collection on illicit cigarette sales by spreading awareness that hopefully leads to tax justice. The overarching objective is to sensitize both the stakeholders and the general public alike about the need for an urgent reckoning and intervention towards this alarming situation.

The minimum selling price of a cigarette pack in Pakistan is Rs. 62.76 below which no cigarette brand in the country can sell – selling of open/loose cigarettes is against the law. Excise and sales taxes are a major component of the cigarette price. The government over the years has raised taxes on the tobacco sector that resulted in excise led price increases, sadly only by the legitimate sector. The local illicit sector did little to increase the prices of its brands that sell between a range of Rs. 30 to Rs. 40 resulting in illegal and illicit trade capturing the market share since these illicit brands sell at very cheap and low prices.

Broadly, the tobacco sector value chain starts with 75,000 farmers who are contracted and are responsible for cultivating the crop. The legitimate sector has agreements with the farmers as per law, whereas the illicit manufacturers have many farmers growing tobacco without any contracts. The second stage is the green leaf-threshing units. This is the narrowest link in the supply chain as only 11 units operate in the country where tobacco is threshed/treated to be usable for manufacturing cigarettes. Then come the manufacturers with two companies in the legitimate sector i.e. Pakistan Tobacco & Philip Morris and rest doing illicit trade. The value chain finishes with over 500,000 retailers throughout the country. Effective monitoring of GLT units and making the documentation measure more robust by increasing the advance adjustable tax at this stage is the most effective way to curb illicit trade and enhance revenues.

To reduce duty not paid cigarette market by plugging leakages and stop revenue losses, FBR introduced an Rs 300/kg adjustable advance tax (First Schedule, Table I, Serial No 7 of the Federal Excise Act 2005) implemented in the Mini Budget on 18 September 2018.
This is applicable on processed tobacco that comes out of Green Leaf Threshing (GLT) Plants of cigarette manufacturing units that also process tobacco leaf for cigarette manufacturers who do not have GLT plants.
Tobacco companies conduct an exercise of planning and strategizing their annual demand and presenting the same before Pakistan Tobacco Board (PTB) for it to apprise the tobacco growers of the estimated annual requirement of tobacco companies through publishing in national dailies. This exercise is mostly performed by the legit sector. There are other manufacturers/dealers who do announce their requirement but the same is often understated.
Tobacco growers then bring tobacco bales to purchase depots set up by tobacco companies in designated areas. Here the companies assess the grades and conditions of the bales and purchase the accepted bales for forwarding to GLT plants for converting the unprocessed tobacco into processed tobacco.
During the leaf buying period [which lasts for 60-70 days], often there are buyers who initially did not declare/under declared the demand with PTB. These buyers [who initially did not declare/under declared the demand and which include cigarette manufacturers] are able to sell that tobacco to other cigarette manufacturers or use it to manufacturer cigarette themselves due to lack of administrative and enforcement controls.
Since the tax evading manufacturers show their final liability to be much lower and are involved in under declaration and under invoicing, this input tax adversely affects them and their cost of doing business.
For them it is not a cash flow concern, something that the legal business might pry over, for them their illegal money and their corrupt practices are being blocked at the narrowest link in the whole supply chain – 11 GLT units in the whole of Pakistan.
Whereas the intent of the FBR to increase the advance adjustable tax from Rs. 10/kg To Rs. 300/kg was the most effective measure to increase documentation, unfortunately this was reduced back in the FY ’19/20 on 11 June 2019 because of various false claims suggesting that this was applicable on farmers.

The legitimate sector apart from contributing 97% of the Rs117 billion in taxes from sales of cigarettes also directly contribute to the GDP Rs42 billion from factory operations only and through the factory operations alone provide direct and indirect plus induced employment for 72,000 jobs. The government and FBR tried good solution of track and trace system and taxing & monitoring Green Leaf Thresher units but the attempts were foiled by vested interests. Enforcement of the legislation is in limbo and the cost is paid by millions of Pakistanis. Now the endeavor is to make this right and your contribution in this campaign is the fillip we are looking forward to. We believe that with your valuable contribution this campaign will go a long way in making a better (Behtr) Pakistan not only for us but also for our future generations.