Smuggling: Addressing the grass roots

Federal Board of Revenue has recently included all cigarette brands to its list of notified smuggled items; in effect, empowering the Customs Department to withhold the release of smuggled cigarettes despite the payment of redemption fines during the adjudication process. The question is whether this inclusion alone would make any difference. The prevalence of smuggled auto parts in the country, despite being on this list may lend clues to the answer to this question. According to an industry estimate, only 12.5 percent of spare parts available in the market are made by original equipment manufacturers (paying high taxes and duties), while a large chunk is smuggled (thus evading all taxes). So, it appears that a similar policy change for cigarettes will likely meet a similar ill fate. To deter smuggling in this context, authorities have to do their homework on how these goods are smuggled into the country, brought to local markets and most importantly; why do consumers opt for such goods. Only then can authorities effectively clamp down on such illegal activities. Since the government is aware that the organised sector is a considerably less tax-evading sector; it is levying very high taxes on it, taking goods out of the common mans reach. Consequently, people with lower purchasing power have to succumb to purchasing the much cheaper, smuggled goods. The best example is the tea market. In a previous interview with BR Research, Chief Executive Unilever Pakistan, Ehsan Malik, said that his firm pays Rs.90,000 per ton as import duty and sales tax on tea, while the smuggler pays zero. Due to high prices of legally imported tea, more than 50 percent of the tea consumed in Pakistan is smuggled and is causing huge losses to the national exchequer. Same is the case for cigarette manufacturers where more than 20 percent of demand is covered by the illicit sector. According to an estimate by a local cigarette manufacturing concern, government is losing more than Rs.7 billion annually on account of cigarette smuggling. "We have been insisting the government to reduce tea taxes to allow us to overcome the price differential. The consumer will benefit because the price of the product will go down, the incentive to smuggle will be removed, and everything will be brought under the official net...and at half the total tax levies, the government will still make the same tax revenues," said Malik. So, rather than adding up items on an already ineffective list, the government should curb smuggling and increase tax collection by lowering its tax rates. Alternately, customs mechanisms need to be further streamlined to ensure that the menace of smuggling is kept to a minimum. Yet, going by precedence, the former may be a more achievable option for the government.