EDITORIAL: Tobacco and tobacco products are subjected to heavy taxation the world over primarily to contain and discourage their consumption because of their devastating effect on health of their consumers. In Pakistan too, a hefty levy of taxes is applied to tobacco and its products. Tax evasion in this sector is, therefore, extremely lucrative and prevalent according to industry sources. It is very likely that the Rs 40 billion loss that the Federal Tax Ombudsman (FTO) believes the Federal Board of Revenue (FBR) suffered between 2017 and 2019 ‘due to poor monitoring of the Green Leaf Threshing (GLF) units’, where tobacco leaves are dried after harvesting, is just the tip of the iceberg. The FTO’s report is full of observations and deductions like massive tax evasion at GLT stage, maladministration on the part of FBR’s field force and defective monitoring of GLT units, but its main thrust is that FBR officials have been and continue to be hands in glove with Big Tobacco and help them evade taxes. It’s also called for an inspection of the office of Inland Revenue, Peshawar, which has jurisdiction over monitoring of GLT units.
Just a few days ago both tobacco and tax experts were left scratching their heads because their concerns about tax evasion in the industry and recommendations about plugging the bigger holes always seemed to hit a brick wall. They agreed that the best way to effectively tax tobacco, even ‘remove tax evasion completely’, was taxing it at the threshing stage. Monitoring of the 10 plants ought to be much easier, after all, than keeping an eye on the production and sales of more than 50 companies. SRO 1149 authorised FBR to appoint an Inland Revenue officer to oversee the threshing plants, but it hasn’t been implemented despite the lapse of three years. That’s also got the FTO very upset, which is why the FBR has been directed to identify officers who have delayed this implementation and then proceed with proper disciplinary action against them. It’s also been asked to conduct yearly analyses of tobacco produced in Pakistan vis-a-vis declared tobacco consumption by all cigarette manufacturing units from 2019-20 onwards, which should give it a good idea about the loss of revenue caused by unaccounted for tobacco.
Experts put annual tax evasion in tobacco at somewhere around Rs 80 billion. This sector paid Rs 135 billion in taxes in FY2020-21 which was Rs 18 billion higher than the previous year. The target for FY2021-22 has been set at Rs 135 billion, which shows confidence in the trend of the last two years to continue. But it could become a problem if FBR officials themselves are not willing to play ball and help the government’s efforts to raise revenue in what is, after all, a very crucial year for the economy. All its workers that are helping these corporations evade taxes are not just drilling a hole in the revenue stream, they are also damaging the economy and undermining tobacco control initiatives.
Now that this particular scheme has been uncovered, though, the state should address it with great speed and full force. The finance ministry often cuts a very sorry figure at year end, when all the tax money is counted against the year’s estimate, because of endless corruption in the system that fiscal policy can do very little about. And the fact that the FBR is also often caught with its hand in the cookie jar only goes to show just how difficult it is to raise tax revenue in this country. If this is really to be the turnaround year in tax collection, then a lot more than implementing dynamic, an out-of-the box policy is going to be needed. The government must also always keep looking over its shoulder to see which of its organs is playing against it. Tax evasion by tobacco companies needs to be checked; and checked very strongly. All such revelations need to be turned into stern lessons for others to watch and learn from. Otherwise, we will always be playing catch up as far as the revenue target is concerned.
Copyright Business Recorder, 2021