The Directorate General of Intelligence and Investigation Inland Revenue (IR), Federal Board of Revenue (FBR), has decided to launch a country-wide crackdown, from March 1, 2012, against non-duty paid cigarette manufacturers and owners of illegal warehouses of cigarettes/tobacco, sellers of smuggled cigarettes, those involved in business of non-duty paid cigarettes/tobacco, and would conduct raids to confiscate non-duty paid/smuggled tobacco and cigarettes.
Sources told Business Recorder here on Sunday that the agency has worked out the revenue impact of Rs 8-10 billion by plugging loopholes in this sector and checking evasion of duties and taxes by the cigarette manufacturers and owners of illegal warehouses. The annual evasion is to the tune of around Rs 10 billion in cigarette industry. The documented sector is paying around Rs 50 billion taxes per annum.
Beside the basic objective of educating all those involved in cigarette/tobacco business, the national drive against the non-compliant cigarette manufacturers would broadly cover raids on the illegal warehouses of tobacco/cigarettes; investigative audit of the 'Green Leaf Threshing' units, examination of tax record and clearances of KP-based cigarettes manufacturers and enforcement of excise laws within the territory of Azad Jammu and Kashmir.
The DG Intelligence IR has established a dedicated unit in Khyber Pakhtunkhwa (KP) for launching drive in Peshawar and other areas of the KP. The dedicated unit of the DG Intelligence IR has been equipment with necessary logistics and officials having ample experience to check sales tax and federal excise. Most of the tobacco industry is KP-based and successful operation in KP would ensure continuation of the drive in rest of the country.
Before launching the drive, the directorate has already started awareness campaign to educate the manufacturers, wholesalers, dealers and sellers of cigarettes. The purpose of the campaign is to inform the cigarette sectors about the basic legal requirements for selling cigarettes to check evasion of sales tax/FED. The pamphlets and other educational material would be distributed among those operating in the cigarette industry and basic provisions of the law would be explained to them on the spot. The awareness campaign would continue during February 2011 before launching the campaign.
The directorate's officials would educate the general public and business community in KP that under federal excise laws the purchase or sale of cigarettes or tobacco is a serious crime under following circumstances:
1. All cigarettes or tobacco on which FED has not been paid.
2. Fake or counterfeit cigarettes.
3. Foreign origin cigarettes on which duty has not been paid.
4. All those cigarettes on which health warnings or retail price has not been printed.
All the above-mentioned categories of cigarettes or tobacco are liable to be confiscated under the Federal Excise Rules 2005. Thus, all persons engaged in the business of cigarettes or tobacco has been warned that from March 1, 2012 strict legal action would be taken against violators of law. As a result of this enforcement drive, the involved persons in the business may face punishment including imprisonment up to 5 years or penalty of Rs 50,000 or penalty equivalent to the amount of duty not paid on tobacco or cigarettes. All such cigarettes or tobacco would be outrightly confiscated.
In the first phase, the agency would launch the drive in KP, the major producer of tobacco. The intelligence agency would conduct raids on the premises of illegal warehouses of tobacco/cigarettes and sellers of smuggled cigarettes. The raids on the units engaged in evasion of duties and taxes would give a clear and loud message to the cigarette industry to comply with the law and stop selling smuggled cigarettes. These raids on illegal warehouses would effectively check the supply line of non-duty paid cigarettes to the market. Later, the drive would be replicated in the remaining parts of the country.
At the same time, the basic focus of the drive is to conduct investigative audit of the 'Green Leaf Threshing' (GLT) units engaged in manufacturing/processing of 'un-manufactured' tobacco. As all the tobacco crop is in KP, all the GLT units have also been established in the KP with heavy investment. There are two types of GLT units. First category covers those GLT units which are independently carrying out green leaf threshing process. The second category covers cigarette manufacturers, who are carrying out green leaf threshing process within their registered premises. The directorate has issued audit notices to all the GLT units operating in the KP and directorate's team would examine the record of such units with the help of production analysis and other relevant data. The investigative audit of seven GLT units is being conducted in the KP. The audit would be instrumental in quantifying all inputs and outputs at the GLT units and conduct comparison of different units to verify their production on the basis of available record.
Sources said that the Federal Excise Rules have clearly directed the cigarette manufacturers to declare their warehouses engaged in the storage of tobacco/cigarettes. The directorate has given deadline of February 28, 2012 to the cigarette manufacturers for declaration of their warehouses. They would have to notify all proper warehouses before the deadline. The agency has already completed its homework and obtained the details of illegal warehouses established at different places across the country. The directorate of intelligence IR would conduct raids on the undeclared warehouses and outrightly seize the illegal stored tobacco or cigarettes, etc. Once the agency would have all names of the declared warehouses, it would be easy to identify and conduct raids. "We will outrightly seize the undeclared warehouses having non-duty paid tobacco or cigarettes", sources added.
It is almost impossible to provide fake particulars of vehicles which have supplied cigarettes or tobacco to illegal warehouses in the presence of vehicles' numbers recorded by the motorway police at the time of entry or exit. Secondly, any forged record of vehicles delivering consignments could easily be checked with the relevant manufacturer, sources explained.
According to sources, the purpose of the whole exercise is not to harass the small shopkeepers involved in selling of smuggled cigarettes, but to create deterrence against sale of smuggled cigarettes and encourage documentation within the cigarette industry. The drive would automatically force the small shopkeepers to stop purchasing smuggled cigarettes from any source.
Sources said that the detailed investigation of the Directorate of Intelligence IR showed that certain cigarette manufacturers of KP have also established manufacturing units in Azad Jammu and Kashmir (AJK). The purpose of establishing such units in the AJK territory is to make an attempt to check evasion of duties and taxes with the connivance of the tax officials of the AJK tax department. Apparently, it is easy to bring non-duty paid cigarettes from AJK to the tariff areas of Pakistan. The Directorate of Intelligence IR would also approach the tax authorities of the AJK government to chalk out a strategy to check manufacturing of non-duty paid cigarettes in AJK. The agency would ensure that the AJK should not be considered as tax haven for the cigarette manufacturers of the KP. The FBR will take up the issue of enforcement with the AJK tax authorities to improve their enforcement against such units. Otherwise, the directorate of intelligence itself has to take some measures to stop movement of smuggled goods from AJK and strict checking of documents would be done through the enforcement actions at the border areas of AJK. The tax authorities of the AJK have adopted the Pakistani tax laws and similarly they have to adopt the enforcement measures of the FBR on their side.
Sources said that the 80 percent of the market has been captured by two leading cigarette manufacturers. The remaining 18 percent of the market is being operated by small cigarette manufacturers of KP including AJK. The 18 percent of the market cover 34-40 units including eight cigarette manufacturers in the KP. These eight units of KP have the advantage of availability of tobacco which is grown in the same province. The said units having 18 percent market share, have deposited only 0.5 percent of the total taxes deposited by the cigarette industry. The remaining 1.5 percent of the market is flooded with smuggled cigarettes and 0.5 percent market contains counterfeit or fake cigarettes. Thus, the focus of the drive is 18 percent of the market of small and medium cigarettes manufacturers of KP where evasion of taxes is taking place.
It is expected that the directorate would be able to check evasion of Rs 8-10 billion which is taking place in this sector with the help of measures taken to increase revenue collection.