Directorate General of Intelligence and Investigation Inland Revenue (IR) Federal Board of Revenue (FBR) has raided an independent cigarette filter manufacturing unit and scrutinising records to verify its supplies to units involved in evasion of excise duty etc.
Official sources confirmed to Business Recorder here on Sunday that a filter rod manufacturing unit in Karachi has been raided by the agency. An expert team of Karachi IR intelligence Directorate raided the Filter manufacturing factory and seized all its record. At present, the seized record is being analysed to check whether supplies are being made to units involved in tax evasion. The analysis would confirm whether duty has been paid on the actual production of cigarettes manufactured from filter rods supplies by the said unit. The raid is part of the overall policy of the Federal Board of Revenue to curtail illicit cigarette production in the country.
According to experts, the move by the government agency has been made when the illicit cigarette trade has increased to very high rate. As reported in a recent research by Nielsen of the total illicit cigarettes sold in Pakistan in 2014, 89% are local tax-evaded and in 2014 alone. This means that around 17.3 Billion Local Tax Evaded cigarettes were sold in the country openly and widely.
Since cigarettes attract very high excise taxes, duty evasion is rampant in this sector. The under and mis-declaration by the companies is difficult to trace especially after the removal of supervised clearance which had its own drawbacks. This time however the government seems to be stepping in the right direction by targeting the inputs used by the tax evading manufactures as that would allow the government to measure the quantum of the cigarettes produced but not declared for tax purposes.
They raised question that the issue that remains however is that the much of the raw material procurement for such cigarettes remains out of the books and in many cases is smuggled. However, there are a few inputs which are locally produced and if monitored effectively can yield positive results for revenue increase.
One such raw materials is the filter rod. Many of the manufacturers purchase the filter rod from a handful of local filter rod companies and that is why the government seems to have shifted its focus to these units.
According to experts, 1 filter rod is enough to be used in 6 cigarettes. Therefore if the government can ascertain the amount of filter rods supplied to a manufacturer it would not be difficult for it to also determine the production of that manufacturer.
Filter rods also attract an adjustable duty of Rs 0.75 which the purchaser ie the manufacturer can claim against his payment. However if the transaction is undocumented the question of paying or claiming the tax does not arise.
Similarly, according to SRO 61 (I)/2010, the federal government has directed that the filter rods for cigarettes shall not be supplied or sold to any person who is not registered under the said Act. Whether this law is being violated or not is again not known.
The analysis of recently seized record of the Cigarette filter manufacturer, may bear positive results and prove to be a step in the right direction. However, to tackle an ill as widespread as this, there is a need to step up efforts and expand focus to also include audit of other raw materials ie tobacco crop, cigarette paper etc as only that would allow the government to check evasion and increase its revenue from this sector.
From the start of the local cigarette supply chain to the very end, illicit traders in Pakistan come in different guises. While currently there are laws to monitor and check tax evasion up till the manufacturing stage, the final stage, ie where illicit cigarettes are sold to consumers is left wholly un-monitored. Illicit cigarette retailers therefore take full advantage of this loop-hole and it would serve FBR's tax collection efforts well to seal this leakage by amending the Federal Excise Act and Rules to hold retailers responsible for selling cigarettes below printed price.
Currently, as taxes are paid at manufacturing sites, retailers are absolved from criminal liability for selling tax-evaded cigarettes. Since illicit manufacturers do not pay due taxes they are able to price their packs as low as between Rs 15 to 20, which is not only lower than the price they print on the packs themselves but also lower than the minimum tax payable per pack.
Amending the Federal Excise Act & Rules to hold retailers responsible when selling below printed price would result in better enforcement and improve deterrence.