The Federal Board of Revenue (FBR) has constituted a committee to examine merits and de-merits of tax stamping on cigarettes manufactured by local industry for collecting Federal Excise Duty (FED) and sales tax as a 'special levy'.
Sources told Business Recorder here on Friday that the committee comprised stakeholders like Chief Sales Tax/Federal Excise, Directorate General of Intelligence and Investigation Inland Revenue, multinational cigarette manufacturing companies and others to check illicit trade of tobacco through tax stamping on cigarettes.
The FBR reportedly intends to implement a tax labels/stamps and supervision project for the purpose of eliminating tax evasion from the cigarette sector. The committee would ensure all aspects of the projects including its implications on the cigarette industry.
Under the proposal, FED and sales tax would be collected as a special levy by affixing tax stamps on cigarette packs without any change in revenue impact on the industry.
Experts raised the issues which needed to be addressed before implementation of the tax stamping project in Pakistan. The first objection is that how the new mechanism would be able to distinguish between fake stamps and genuine stamps. If a shop is selling tax stamped cigarettes, how tax officer would be able to distinguish between fake stamps and genuine stamps pasted on cigarettes. If genuine tax stamps could be made, similarly fake tax stamps can also be printed. How the FBR will ensure that the printer of tax stamps would not print fake stamps for counterfeit cigarettes sold in the market? How the FBR will guarantee that the printer of tax stamps would not misuse the facility?
Secondly, the question arises whether the project would increase the cost of the multinational companies. The cigarette manufacturers have to install special machines for affixing tax stamps on cigarettes with additional cost of the project. Why such additional investment be made on purchase of specialised machinery for the purpose. Whether tax stamping would increase the upfront cost of the manufactures? If sales tax and FED has been paid in advance in the form of tax stamps, whether this proposal would cause liquidity crunch for the cigarette manufacturers? The payment of taxes in advance at the time of fixation of tax stamps may create liquidity problems for the multinational companies.
Thirdly, if the purpose of tax stamping is to check fake or smuggled cigarette packs, why printed retail price and pictorial health warnings have not been enforced by the cigarette manufacturers? The pictorial warnings would also effectively check sale of counterfeit cigarettes. In the presence of pictorial health warnings, is there any need affix tax stamps on cigarette packs?
Fourthly, smuggling of cigarettes could be controlled by pictorial health warnings on the packs, experts added. On the other hand, sources said that with the objective to improve tax recovery and support cigarette industry in its fight against counterfeiting, the Request for Proposal (RFP) for procurement of Tax Labels and Supervision System lays down the functional and technical requirements of the system to be designed and proposed by the interested bidders. Although solution is required to cover both the locally manufactured and imported cigarettes, yet the functionalities does not mention in detail the workflows with regard to imported cigarettes.
The technical requirements section includes system architecture, security protocols, operating systems, communication networking and description of hardware required. Moreover, the infrastructure laid down in the technical requirement is already available with FBR. It has been informed that the entire cost of the tax stamping shall be translated into unit cost of the stamp and shall be charged to the cigarettes manufacturers as a special levy. The vendor would be paid from the said account, as such there would be no financial implication on the government exchequer, sources added.