The enforcement agencies of the Federal Board of Revenue (FBR) Saturday launched a massive crackdown on the non-tax paid cigarette manufacturers whose share stands at more than 40 percent of the total market of cigarettes in Pakistan. Sources told Business Recorder here on Saturday that the dedicated taskforce Inland Revenue Enforcement Network (IREN) FBR, Directorate General of Intelligence and Investigation Inland Revenue and Directorate General of Intelligence and Investigation Customs have launched a number of initiatives against non-tax paid cigarette manufacturers specially non-duty paid (NDP) cigarettes coming from Azad Jammu and Kashmir.
In the Federal Budget 2017/18, a 3rd tier was introduced to bring the illicit players within the tax net. Enforcement of the 3rd tier allowed the legitimate cigarette industry to place their brands in this segment and helped in pulling the prices of non-tax paid brands upward. The government also introduced a minimum price law and stricter penalties on sale/purchase of non-tax paid cigarettes.
A dedicated taskforce called the Inland Revenue Enforcement Network (IREN) was also formed by the Federal Board of Revenue (FBR) to curb the sales of illicit cigarettes in Pakistan that were causing losses of around Rs 40 billion annually to the national exchequer. The last 5 years data suggests that the total loss to the government exchequer crossed Rs 130 billion in shape of FED and sales tax revenues due to the growth of this illegal sector. This initiative allowed the government of Pakistan to seize more than 1 billion sticks, worth millions of rupees, and seal nine factories of non-tax paid cigarette manufacturers in the Khyber Pakhtunkhwa (KPK) province.
The government has also launched massive media campaigns to create awareness regarding the sale, purchase and even possession of non-tax paid cigarettes; thereby, creating deterrence for consumers, retailers, distributors and manufacturers. All these actions resulted in curbing the aggressive growth of non-tax paid cigarettes, creating major disruption in their supply chains, however, the journey to eliminate the non-tax paid cigarettes is far from over and these law enforcement agencies are already facing many difficulties. Recently, the Lahore High Court (LHC) dismissed the petition of cigarette manufacturers and distributors of Azad Jammu and Kashmir (AJK) including Walton Tobacco, Nobel Tobacco and Watan Tobacco. These petitions filed in the LHC were taking the plea that the IREN FBR is not competent to intercept or check cigarettes manufactured in the AJK. The LHC has stated that the Pakistani tax authorities have the legal power to check, inspect and monitor the trade of cigarettes within the jurisdiction and if any movement is against the law, they can seize the non-duty paid cigarettes allowing Pakistani tax authorities to effectively check the cigarettes manufactured in AJK and brought into the territorial jurisdiction of Pakistan.
Meanwhile, a tax expert was of the view that Finance bill 2017 has been vetted not just by FBR but also by the Ministries of Finance, Law and Commerce, and other relevant departments after which it becomes an Act by members of the Parliament. Therefore, question arises whether or not any move to suspend Finance Bill 2017 would be appropriate. Furthermore, the actual government revenues have increased from Rs 30 billion to Rs 37 billion from documented sector in 2017-18 registering an increase of 23% from last year. Therefore, the argument that the revised duty structure on cigarettes has caused revenue loss also becomes null and void. It was clear that due to abundant availability of cheap tax-evading cigarettes, consumers would keep buying and shifting to the lower priced illegal products. Hence, during in the mid of 2017 and afterwards, the FBR adopted this aggressive approach which has since brought in quantifiable results.
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