Cross-border tea-rrorism

Smuggling of tea to Pakistan from Afghanistan has been a persistent problem for more than a decade. However, it has worsened in the past 4 years as during this period, the international price of tea has roughly doubled while the local currency has depreciated considerably.
Industry participants contend that relatively high consumption taxes have created a large incentive for smugglers and profiteers.
"While 87,000 tons are imported legally, the actual consumption of tea in the country is closer to 200,000 tons per year," asserted K. N. Farooqi, General Secretary Pakistan Tea Association, adding that the "differential is made up by smuggled tea".
Unilever and Tapal together pick up about 85 percent of the total official tea imports to the country. FBS estimates show that about 100,000 tons of tea was imported to the country in the first 11 months of FY11.
However, Chairman Unilever Pakistan Ehsan Malik told BR Research that the official data is derived from the duty received by customs while industry estimates are calculated by tallying the successful bids from Pakistan and Afghanistan in tea auctions in Kenya, hence making the latters figures more accurate.
Malik explained that at present, the government reaps about Rs113 per kg including 10 percent customs duty and 2.5 percent customs clearing charges as well as 16 percent sales tax. The industry-wide contribution to the exchequer stands around Rs10 billion per year, besides a cumulative income tax liability of about Rs1.5 billion.
Tea importers and the FMCGs have been lobbying the government to slash taxes and duties from the current level to about Rs41 per kg. They have pledged that the resulting reduction in costs will be passed on to consumers, lowering the retail prices of the hot beverage by about Rs72 per kg.
The lobby asserts that this reduction in prices will reduce the differential that smugglers capitalise on, from Rs116 per kilogram to a meagre Rs15 per kilogram. Industry estimates show that at present, bribes and kickbacks paid by smugglers amount to about Rs30 per kilogram.
Hence the reduced retail prices would dry up profit for the unscrupulous profiteers and force them out of the market. "We have even assured the government that we will ensure that the total tax collection does not fall below Rs10 billion, or else we will foot the bill" asserted Farooqi.
It is also imperative that the government should withdraw general sales tax on tea. After all, far from being an extravagance it is a staple diet particularly for lower income groups for whom a meal is often nothing more than a single chai roti.
India, which meets its tea demand with domestic production, charges just 4 percent VAT on tea for specifically this reason.
Besides evading the countrys tax authorities, sellers of smuggled tea often adulterate their products with gram husk and saw dust which can pose health risks to consumers.
While the government is in the process of renegotiating the Afghan Transit Trade Agreement, industry sources assert that such administrative measures cannot completely curb smuggling. "The border is just too porous for that," opined Ehsan Malik.
The tea importers and sellers argue that taking away the economic incentive from smugglers is the most effective way of rooting out this problem. They contend that the government may even consider raising taxes, once this menace has been rooted.
The recommendations of this sector appear practical, especially considering their guarantee to help maintain the governments revenue collection from tea imports and sales. Malik revealed that FBR Chairman Salman Siddique has also given his tacit approval to the plan, but adds "the process will likely take a year or two given the current circumstances".
The border between Pakistan and Afghanistan stretches 2430 kilometres through some of the most treacherous terrains in the world. As such, it is nearly impossible to clamp down on cross-border movement.
Instead the government should consider the recommendations of the local tea industry, not only to discourage smuggling but also to provide some relief to the masses in the form of lower prices for their favourite hot beverage.