In the first ever initiative of its kind, Nadra has made a proposal to CBR to consider affixing counterfeit-proof holographic excise duty stamps on cigarette packs and alcoholic beverages to control central excise duty and sales tax evasion on these items.
Under the excise law, the CBR is authorised to make it mandatory for all cigarette and beverage manufacturers to paste excise duty stamp on each item they market. According to a Recorder Report, CBR authorities have in principle agreed to the Nadra proposal and are currently engaged in working out modalities of its enforcement.
If the government approves the scheme, a Ukrainian company specialising in this field will be approached to supply high-tech multicoloured holographic stamps to CBR. The stamp, designed on a "fraud-proof" paper, has the appearance of a small sophisticated currency note, and carries multidimensional intricate holographic security features that will make counterfeiting almost impossible.
According to the plan, the CBR will provide a specific number of these high-tech stamps to cigarette and alcoholic beverage manufacturers to charge excise duty and sales tax on their sales. The stamps affixed on cigarette packs and alcoholic beverage bottles will also help to identity the manufacturers who will be responsible for payment of all duties and taxes to the exchequer.
The plan represents a brave new attempt to promote sales tax culture and discourage production of counterfeit brands, which seem to have flooded the Pakistani market on an unprecedented scale.
Cigarettes have been traditionally heavily taxed in Pakistan and indeed in the entire developed world, to discourage their use on health grounds, and the manufacturers have been forced to print on packs warnings about the injurious effects of smoking. Similarly, steep duties and taxes have been clamped on the manufacture and sale of alcoholic beverages in Pakistan due to the legal restrictions imposed on their use.
However, paradoxically enough the levy of heavy taxes to discourage their use has raised manifold the profit margin for the smugglers of these items. It is said that cigarettes exported to Afghanistan are repackaged in packs bearing prestigious international brand names and smuggled back into Pakistan, causing huge loss to the national exchequer.
Incidentally, a vast variety of smuggled merchandise has been moving both ways across the porous Pakistan-Afghanistan border over the decades. As a result Bara markets in Pakistan are flooded with a vast array of "duty-free" merchandise, which has adversely impacted Pakistan's manufacturing sector.
This is being widely seen as the dark underside of Afghan Transit Trade. A 2001 UN study estimated that unofficial "exports" from Afghanistan into Pakistan in 2000 had totalled $941 million, with merchandise worth another $139 million moving illegally from Afghanistan to Iran.
Under a strategy to neutralise the impact of smuggled goods, Pakistan has progressively reduced import duties to diminish the profit margin on smuggled products. It has also ended duty-free access through Karachi port for Afghanistan-bound goods, such as TV sets and cigarettes that end up being smuggled back into Pakistan.
The main objective of banning import of cigarette was to bolster the local industry. But it has only proved counterproductive for the local industry as under the umbrella of Afghan Transit Trade it has been turned into a big money spinner by unscrupulous traders by evading Pakistan's stiff taxes and duties on foreign goods.
Most of the goods exported to Afghanistan under concessionary terms are often smuggled back into Pakistan, which causes huge annual loss to the exchequer in terms of unrealised sales tax and excise duty targets.
According to one estimate, foreign goods worth over Rs 43.24 billion entered Pakistan without payment of duties and taxes in 2004 alone! This provides a measure of the huge quantum of loss sustained by the exchequer.
The initiative to affix counterfeit-proof holographic excise duty stamps on cigarette packs and alcoholic beverages must serve as an effective curb on the illegal traffic.
Although the cost incurred on packaging will increase, but it will be worth it in terms of the additional revenue to be generated. The CBR should solicit detailed feedback from all the stakeholders before taking a final decision on the scheme.