EDITORIAL: At a time when the federal government and finance minister are all talking about documenting the economy and digitisation of the value chains to broaden the tax net and increase the tax-to-GDP ratio, smuggling and tax evasion are rampant.

Consequently, there is a reduction in the formal sector footprint, expansion of the black market, and penetration of inferior products (especially in food). And with all these externalities, the government is being challenged in revenue generation.

There are a few examples to quote, and the federal government should revisit its strategy in the upcoming budget and in its negotiations with the IMF (International Monetary Fund). The sectors that are visibly affected are the formal juice sector, dairy and other food products, tobacco, petroleum products, and their derivatives.

The smuggling of Iranian diesel into the country has been well covered in this space. Needless to say, it is adversely impacting the local refinery industry and jeopardising their plan of upgradation and modernisation. Reportedly, 30 percent of the diesel market is dealing in smuggled products while the government is losing around Rs17 billion per month, leading to a thriving illegal value chain.

Another problem is that of tobacco where the government increased the taxation by 200 percent last year, but the growth in government revenue has been very limited as the move resulted in a decline of more than 50 percent in the sales volumes of two big tobacco companies. Moreover, the market share is captured by smuggled, counterfeit, and duty-not-paid tobacco. This is again spurring an illegal value chain. The government is not only losing growth (tobacco production in LSM has declined 40%) but the consumer is also getting expired and inferior products, which are even more injurious to health.

Then the formal juices industry was adversely impacted by the imposition of FED (federal excise duty) at 20 percent last year. As stated earlier, the formal industry’s volumes are down by 40 percent this year and the market size is either shrinking or being grabbed by illicit players. The overall impact of GST (18 percent) and FED (20 percent) is, in fact, 42 percent, and that is a big enough incentive for low-quality products by the informal sector to spur. They have enough room to cut prices and grab the formal market share; as in days of falling purchasing power, the consumer is moving away to cheap (but unhealthy) products.

There are clear trends of falling formal juice consumption after the imposition of taxation. When a 5 percent FED was imposed on packaged juices, for example, formal market’s sales dipped significantly. Upon being removed from FED, not only did the sales recover, but volumes showed a handsome growth over the next three years. Sales reached Rs 60 billion while the industry employed around 10,000 people. The much-needed fruit value chain was developing with players coming into the pulp market and resultantly, the farm-to-market fruit losses were reducing. Now after the imposition of 20 percent FED, not only, volumes are down to three-fifths, but also the fruit value chain has been disrupted. For example, in 2020, around 100,000 tons of mangoes and other fruits were procured by the industry to form pulp and now that is down by 50 percent.

The industry is losing its potential to develop nutrition and safe products for local consumption but also to explore exports. Higher FED is hindering growth to attain scale and hence export potential is being compromised. The government should revisit its policy of 20 percent FED in the upcoming budget by carefully carrying out the cost-benefit analysis.

Another example of a boost to illicit products is the lack of enforcement of SRO 237 (imported products should have a 66% shelf life, have ingredients mentioned in Urdu and English languages, and have Halal certification). These are simply not followed, and imported food, including dairy products from Iran, seems to have caused a glut-like situation in supermarkets. These may have been already expired. These may not be strictly Halal and do not necessarily comply with health standards.

The bottom line is that the government is imposing taxes on formal industry with a view to generating more revenues. However, in the absence of enforcement, informality is growing, and the government is not only losing potential revenues, but formal value chains are also not developing, while smuggling and availability of inferior products (including counterfeit) are on the rise.

These are resulting in consumers having less nutritious products (in the case of food) and the illegal and informal value chains are building where black markets are providing a safe haven to terrorists and drug dealers.

It’s about time the finance minister revisited the strategy by reducing taxes and implementing enforcement.

Copyright Business Recorder, 2024