Rs80bn per annum tax evasion in illegal tobacco trade: IPSOS report

ISLAMABAD: An international research organization on Saturday revealed that the tax evasion of Rs80 billion per annum is taking place in Pakistan due to illegal tobacco trade, as illicit cigarettes cover 40 percent of the total market.

This is the crux of the report launched by the IPSOS, a France-based global leader in market and social research, here on Saturday.

According to the IPSOS's report, massive tax leakage is due to several sectors in Pakistan's economy that have been depleting revenues that could potentially turnaround the fortunes of the country.

Five key sectors are tea, tobacco, tyres and auto lubricants, pharmaceutical, and real estate. The IPSOS report mentioned that tax evasion due to illegal tobacco trade in Pakistan is a huge Rs80 billion annually. Illicit trade in cigarettes comprises close to 40 percent of the total cigarette market.

Prime Minister Imran Khan has also made a statement during a cabinet meeting that "98 percent of the tax in the tobacco industry is paid by two companies who have 60 percent share in the tobacco industry, while there is nearly no collection of tax on the remaining 40 percent market share holders".

This statement of the country's Chief Executive speaks volumes of the problem of tax evasion within the cigarette sector.

This tax evasion is carried out through the illegal trade of tobacco and has three main strands, local duty-not-paid cigarettes, smuggling and counterfeit cigarettes, each having its own estimation of losses to the national exchequer, and additional violations of several other laws in the country.

Local duty-not-paid cigarettes is the most significant in terms of tax evasion within the three strands and has the majority shares within illicit with almost more than 90 percent.

The mandated minimum price of a cigarette pack as per law is Rs62.76 which includes a minimum tax of Rs42.12.

There are more than 200 local tax-evading brands that are selling nation-wide below Rs42.12.

This tax evasion makes smoking affordable in the country and has enabled the illegal cigarette industry to thrive.

Tax evasion in the real estate sector is estimated to be around Rs60 billion, whereas the loss to state revenues by the illegal tea sector is Rs35 billion. Loss to national kitty due to illegal trade in the pharmaceutical industry is estimated at Rs45 billion, while tax evasion in tyres and auto-lubricants industry is estimated at Rs90 billion.

The total estimated annual tax evasion in the sectors mentioned above is Rs310 billion.

Pulling the leakages in just these five sectors can generate enough revenue to finance social and infrastructure development projects essential towards much-needed socioeconomic development.

With this amount, the Government of Pakistan can cover approximately 80 percent of the total national development programme (Rs418 billion) of all the federal ministries for the year 2020-21.

If this tax evasion is plugged, the federal government can increase the size of the federal education budget by almost four times.

The scope and budget of the federal government's premier social welfare programme Ehsaas can be increased by 60 percent.

The federal government can easily build the Mohmand Dam (total cost: Rs309 billion) with this amount, the IPSOS's report added.

Copyright Business Recorder, 2021