Increase in sales tax rates: traders apprehend rise in tea smuggling

The government's recent move to withdraw SRO-608(I) (2012) will boost the smuggling of black tea through Afghan Transit Trade (ATT) in the country, compelling traders to import high-quality tea in Pakistan via legal channels, sources told Business Recorder.
Market leaders expressed serious reservations over the increase in the rate of sales tax from 5 percent to 16 percent on legal tea imports, resulting in a significant rise in the prices of tea varieties ranging between Rs 80 and Rs 100 per kilogram in the local market.
The government reversed its pervious decision of charging 5 percent sales tax [SRO-608-(1) 2012] on black tea imports, by revising its standard rate back to 16 percent.
"At present, we have been paying Rs 1.8 to 1.9 million duty on a import of single container carrying black tea varieties while only Rs 800,000 to Rs 900,000 is being paid per container on tea imported via ATT, creating a disparity of Rs800,000-900,000 per container between legitimate and illegal trade in head of taxes," said Hamid S Khawaja, the Chairman of Pakistan Tea Association (PTA).
On June 2 last year, the government had reduced sales taxes on tea imports to discourage smuggling of tea and improve legal imports. The decision was reversed only after right months.
The PTA chairman said that the increase in sales tax would encourage the undocumented sector, saturating the local markets and incurring substantial losses to the national exchequer.
Khawaja said that the total consumption of black tea stood at 220-240 million kilograms per annum, of which 126 million kgs was imported via legal channels while the rest is smuggled through ATT.
Importers would have no option but to import low-quality tea varieties because of the increase in sales tax tariff, said an importer, adding that the import of cheap tea might touch a new high soon.
"The influx of low-quality tea has surged significantly in Pakistan, on which import cost is between $1.5 and $2.5 per kilogram," he said.
Sources said that devaluation of Pakistani rupee against US dollar also gave a significant boost to the profit margin on illegally traded black tea.
They said traders largely opted for purchasing smuggled tea, instead of going for the imported commodity, reaping a sizeable profit on its sales. The trend has, however, badly the hit the importers, they added.
Saleem Khan, a retailer, told this correspondent that he preferred to sell smuggled varieties because legally imported tea were far more expensive, adding that illegal tea varieties benefited the traders by Rs 50-60 against legal imports.