The Competition Commission of Pakistan (CCP) has strongly recommended Federal Board of Revenue (FBR) and Ministry of Commerce to rationalize taxes including customs tariff on tea to control its smuggling, revisit negative list under the transit trade agreement and take up issue with the Afghanistan Pakistan Transit Trade Coordination Authority (APTTCA) to curtail black tea import which is in excess of Afghan demand.
In this regard, the CCP has conducted the competition assessment of the tea industry in Pakistan. In this study, the CCP has recommended that the smuggling is the biggest threat faced by the domestic tea industry, causing loss of millions of rupees to the government and forcing legal importers out of business. The government must take firm action to curb the illegal trade. A combination of tax and enforcement tools can be used to control the practice. The incentive to smuggle comes from the difference in taxation on tea imported for Pakistan and that imported for Afghanistan.
This difference can be reduced through tariff rationalization by reducing the tax imposed on Pakistani imports, and by increasing the cost of tea landing in Pakistan for Afghanistan.
By decreasing cost of legal imports, the smuggling trade can be made unprofitable. Under the Afghan Transit Trade Agreement (now Afghan Pakistan Transit Trade Agreement - APTTA), the Afghanistan-bound tea imports land at Pakistan's
port. The product leaves the port, but instead of crossing the border, it flows into the Pakistani market, particularly in the towns of the province of Khyber Pakhtunkhwa (KPK). Even if the product crosses the border, the border's porous nature allows for the product to be transported back and sold at a lower price in Pakistani markets. Such an arrangement creates opportunity for corruption and is harder to control. The negative list under the transit trade agreement must be revisited to limit the imports of products that hurt the domestic market.
Use of the transit agreement facility for such products may be prohibited or a limit may be applied on the volume of imports. It is, therefore, essential that this matter may be taken up by Afghanistan Pakistan Transit Trade Coordination Authority (APTTCA), Ministry of Commerce with Afghan counterparts, so as to curtail black tea import that is in excess of Afghan demand. Therefore, the CCP may recommend APTTCA to take appropriate action.
The CCP study observed that the cost for legal imports is higher than the smuggled tea. A price difference is a significant competitive disadvantage to honest importers. As far as future prospects are concerned, based on population and consumption growth, the tea sales are expected to grow by 10-12%. In the branded tea segment, the demand for tea bags is expected to grow by more than 15%, the CCP forecasted.
According to a latest study on tea industry prepared by the CCP revealed that a major challenge faced by the tea industry in Pakistan is smuggling. Under the agreement for transit trade, Afghan imports land at Karachi port, which are then dispatched for Afghanistan. However, instead of entering Afghanistan or even after its entry in Afghanistan, the tea is brought back to Pakistan. This smuggled tea is then sold in the local market along with the legally imported tea. The import cost of tea imported for Pakistan is estimated to be around 32% greater than tea imported for Afghanistan due to the various taxes paid by domestic importers. Due to the cost difference, legally imported tea cannot effectively compete with smuggled tea. The Authority dealing with transit trade highlights that there are no scanners for containers on Afghan border for transit trade, to confirm if the same things are entering Afghanistan that were received in Karachi.
In 2012, the government reduced sales tax from 16% to 5% in an effort to reduce smuggling. This initiative was reversed within 8 months, without allowing for sufficient time to be impactful to curb smuggling. As per CCP viewpoint, a combination of tax cuts and enforcement measures are needed to effectively reduce smuggling and to ensure a level playing field in the tea industry.
The CCP study pointed out, "A major threat to the tea trade is smuggling. Under the Afghan Pakistan Transit Trade Agreement (APTTA), Afghanistan's tea import lands at Pakistan's port. Since this tea is meant to cross the border and enter Afghani markets, no taxes are collected from these imports. The product then leaves the port, but instead of crossing the border, it pours back into the Pakistani market, particularly into the towns of the province of Khyber
Pakhtunkhwa (KPK). The Afghan imports submit a bank guarantee to pay any applicable taxes on the product, if there is evidence that it has not crossed the border. However, even after crossing the border, the border's porous nature allows the product to be transported back and sold at a lower price in Pakistani markets. Such an arrangement creates the opportunity for corruption and is harder to control".
The CCP analyzed, "Black tea is among the top imports of Afghanistan via APTTA. Most of the tea imported via APTTA is black tea in packets exceeding 3 kg. Though, the import quantity of black tea under this HS Code is not significant for Pakistan, the price differential, between the per kg cost quoted by Afghan importers, the per kg cost quoted by international exporters to Afghanistan, and the per kg cost of Pakistan's imports, was quite significant in 2015", it added.
The study said that the industry is represented by the Pakistan Tea Association. Since the membership of the association consists mostly of tea traders, it is unable to represent challenges faced by tea producers. Apart from the National Tea and High Value Research Institute (NTHRI), a multinational company is the only company having experience of tea growing in Pakistan, who is a member of the PTA as well. While a tea board existed, it could not play an effective role in the affairs of the industry.
The Ministry of National Food Security and Research (MNFSR) may consider creating a 'Tea Wing' to devise policies and program to encourage both production and trade of tea. The need for a statutory organization as highlighted by the NTHRI, could be fulfilled initially by this Wing, that may be transformed to a full-fledged Board, if so needed in the long run. The Wing can perform a broad range of functions relating to rendering financial, and technical assistance for cultivation, manufacture and marketing of tea, particularly, to develop the small growers' model in Pakistan.
The CCP recommended that in the absence of any interested parties, it is understandable that we did not see a push from the stakeholders for policy making on tea cultivation. However, KPK and AJK governments may tap the potential for employment generation. The commercialization of tea project through public-private partnership should be revisited with federal, provincial and AJK governments ensuring the secure availability of land to potential investors for tea production, and by involving smallholders as key stakeholders in the project.
The competition in the branded tea market has remained fierce as consumers have a choice to switch to unbranded unpackaged loose tea over branded packaged tea. However, there should be well-justified explanations for prices increases. Competition can be enhanced by market development and eliminating the chances for 'Deceptive marketing', when fake tea is packaged as branded tea. At a local level, information about deceptive marketing can be gathered from the district food officers, district administration and the Food Authorities, which are responsible to monitor quality and price of commodities in the open market, the CCP added.
At present, the tax calculation is based on the monthly average price of tea from each particular source garden or each particular variety. Each country has a number of tea gardens and each garden produces a number of tea types based on processing.
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