Loss of tax collection

The Directorate General Intelligence and Investigation of the Federal Board of Revenue (FBR) has unearthed revenue loss of over 9.5 billion rupees (not 90 billion rupees as erroneously carried by this newspaper in the headline of a news item yesterday) on account of non-payment of excise duty on smuggled cigarettes.
This is a significant amount and given the government's severe resource constraints that are reportedly the reason for the delay in the announcement of the budget for the forthcoming fiscal year, there is a need to plug this loophole. The findings of the report confirm what many had long maintained: that the main source of smuggled cigarettes and associated inputs remains Afghanistan.
The report further reveals that the smuggling of major cigarette inputs, including filtered rods, un-manufactured tobacco, filter paper and tipping paper contributes to the manufacture of counterfeit cigarettes that do not pay the federal excise duty (FED) and therefore remain within Pakistan's large parallel illegal economy. There is an urgent need for the government to deal with this illegal activity in an effort to ensure that it is documented and later taxed. This is also an appropriate line of action from the perspective of the genuine cigarette manufacturers who do pay their taxes honestly.
The Directorate General Intelligence and Investigation FBR has recommended a comprehensive list of remedial measures that include the continuation of the federal excise duty on filter rods, the levy of adjustable FED at the rate of 100 rupees per kg on services rendered by the Greenleaf thrashing plants, a ban on the export of filter rods to Afghanistan and the raw materials used in the manufacture of cigarettes on the negative list of the Afghanistan Pakistan Transit Trade Agreement. Additionally, the government may be well-advised to support a lottery system that would enforce the stamp duty regimen on all cigarette packs sold in the country, thereby ensuring that the government gets to collect revenue due to it. In some countries the tax-to-GDP ratio has improved considerably due to the introduction of a lottery system where shopkeepers provide coupons against the purchase of receipts. This leads to the purchaser insisting on a cash receipt that in turn, helps document the sale/purchase of the item. However, considering that many of these counterfeit cigarettes are sold in shops that are not themselves paying any tax, as they too operate in a black economy, the enforcement of the FED stamp may be a more viable option.
Pakistan's black economy is acknowledged to be around 50 percent of the entire documented economy. In effect, the government needs to try to bring this into the tax net, an objective that has been consciously pursued by the present government as part of an agreement with the International Monetary Fund under the Stand-By Arrangement (SBA). Unfortunately, although the levy of a value-added tax (renamed as the Reformed General Sales Tax) that with the capacity to enhance documentation of the hitherto undocumented sectors/sub-sectors, has become extremely controversial, though the government has indicated that it remains committed to its implementation in the forthcoming budget. The wait-and-see policy adopted by the IMF reflects their concerns about the government's ability implement the VAT in the near future.
Urban-based political parties are opposed to VAT. MQM, for example, strongly argues that the government must focus on taxing the income from agriculture in an effort to render our tax system more equitable. PML (N) underscores the need for reducing corruption within the FBR, a useful suggestion given that the recent audit report noted that irregularities, embezzlement and mismanagement by the FBR resulted in the loss of revenue to the tune of 316.65 billion rupees - an amount, if realised, could reduce our dependence on foreign assistance considerably.
There are many suggestions that are not only viable but also doable. Unfortunately, however, the FBR has remained engaged in an exercise that is focused on increasing revenue and not in rendering the tax system either more equitable, or less anomalous or indeed less corrupt. Within, in turn, would generate a culture of paying taxes honestly.