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According to a UN 'doom's day scenario' the global economy faces a 'US$ 2 trillion' hit in view of the devastation being caused by the novel coronavirus pandemic. But even this figure is only tentative. Seemingly almost the entire world is gradually moving towards a complete lock-down. With such a scenario in the offing one cannot but keep one's fingers crossed while gazing at the proverbial Chrystal ball to find out how Pakistan's economy would fare in case the border clampdown lasts for more than a fortnight.

Meanwhile, the sword of FATF continues to hang over Pakistan. We seem still to be lost in the woods. We do not know for sure whether by the final deadline of June this year - only two months away - we would be able to satisfy our FATF interrogators on the twin issue of money laundering and terror-financing.

Among a number of queries that we would be confronted with at the June meeting, one could also be with regard to the unaccounted billions that are made every year by the unscrupulous through the illicit cigarette trade and their possible utilization in terror financing.

As per Oxford Economics Study, Pakistan ranks 1st in illicit trade of cigarettes in Asia, with a total volume of 326 billion illicit cigarettes consumed in 2017. The primary reason for existence of illicit manufacturers is the tax-driven price differential between legal and illicit brands, which currently stands at 130%.

Apparently, there is no system in the Health Ministry to check or control or monitor the manufacturers, suppliers, sellers and impact on consumers of illicit production of cigarettes.

Currently in Pakistan, tax increases are counter-productive in achieving the government's revenue since they are encouraging people to smoke cheaper cigarettes that are more affordable.

Over 22 million (19%) Pakistani adults (18+) currently use some form of tobacco. Almost one-third of Pakistani men (32.4%) and 5.7% of women smoke tobacco.

An earlier State Bank of Pakistan's quarterly report shows that the sale of illegal cigarettes in the country has increased significantly since the imposition of the Federal Excise Duty (FED).

The report stated that the increase in FED had negative implications for the growth of the formal cigarette industry, as it pushed consumers towards cheaper alternatives in the form of counterfeits and cigarettes smuggled from abroad.

Officially, the lowest cost of a packet of cigarettes is fixed at around Rs 63, from which the tobacco companies are bound to pay at least Rs 42 in taxes to the government. Instead, cigarettes are being illegally and openly sold for Rs 30-40 per packet in major cities across Pakistan.

Muhammad Sabir, Principal Economist at SPDC, presenting the findings of a study has claimed that Federal Board of Revenue (FBR) currently relies on voluntary declaration of production by the manufacturers to determine their tax liability. The absence of an integrated information system creates an incentive for under-reporting of production to avoid taxes. The research findings suggest the presence of under-reporting of cigarettes in the range 22 to 47 per cent. The loss of revenue due to undeclared production is estimated to be Rs 37 billion in 2016-17, including Federal Excise Duty (FED) of Rs 31 billion and General Sales Tax (GST) to the tune of Rs 6 billion. The study also revealed that during 2015 and 2016, when tobacco firms reported a decline in their sales, profit margins remained substantially higher compared to the previous years.

The research work also forwarded policy recommendations proposing that FED is linked with GST collection, and the GST is collected in VAT mode. The GST should be collected at three stages - factory, distributors and wholesalers/retailers.

Academic Hana Ross, a researcher at the University of Cape Town who studies tobacco control, has said that although under-reporting of cigarette production is a problem in many countries, the level in Pakistan borders on "obnoxious."

Pakistan's Social Policy and Development Centre estimates that allowing tobacco companies to self-declare has cost the country 15 to 47 billion rupees in lost taxes each year, between 2015 and 2018.

The FBR tried to make sure Philip Morris Pakistan and Pakistan Tobacco Company - local subsidiaries of Philip Morris International and British American Tobacco, respectively - which together account for some 98 percent of the market - were reporting accurate figures by sometimes posting inspectors in their factories. But the results were patchy at best, according to Hamid Ateeq Sarwar, a member of the FBR.

"The physical presence of people usually yields results in initial days, but dies down after 20 or 30 days, even if we change the people," he claimed.

The government's resolve strengthened, however, after the IMF made having a tobacco track-and-trace system up and running by the end of March 2020, one of the conditions of Pakistan's bailout. In August 2019, the FBR issued another tender and this time, with $6 billion of international assistance on the line, they followed through.

Bids for the system were originally due on Sept 5, 2019, but the FBR extended the deadline twice, first to Sept 20, then to Sept. 27. In the space of these few weeks, the tax authority also dramatically changed the terms of the tender.

Previously, technical expertise was a key consideration: 80 percent of each bid would be rated according to the bidder's technical capability and 20 percent according to price. But in the new tender, any offer that met certain vaguely defined technical requirements would be considered, and the cheapest one would win.

This shift was a crucial one. It took the focus off how effectively the system would police the illicit trade in tobacco and turned it into a price war. What prompted the revisions? It is still unclear.

Organised Crime and Corruption Reporting Project (OCCRP) investigations claim that after a "shady" bidding process, which is now being challenged in court, Pakistan's tax authorities awarded the contract to a company working with Swiss software provider Inexto.

"Critics say Inexto's software is a "black box" based on a system devised by the tobacco industry that does little to help curb smuggling. The company has been barred from working on key aspects of the European Union's track-and-trace system because of its ties to the tobacco industry. Nonetheless, its software is being used to track and trace cigarettes in Russia, West Africa, and Mexico.

"Inexto declined to comment on the tender process, citing ongoing litigation, and said accusations it is too close to the tobacco industry are "entirely unfounded."

"Out of 13 bidders, only one, which appears to be a food export business, was disqualified for technical reasons. When the results were announced on Oct. 14, 2019, it transpired that two of the bidding consortia had been disqualified for giving a conditional price.

"But the winning bidder, the National Radio and Telecommunications Corporation (NRTC), which was working with Inexto, had mistakenly quoted a price that was 1,000 times lower than it had intended (.731 rupees, or less than a penny, per thousand tax stamps, rather than 731 rupees, or $4.74). NRTC was allowed to revise its bid after all proposals had been evaluated and it had been recommended for the license.

"The FBR accepted NRTC's argument that the difference was merely an "obvious arithmetic and accidental typographical slip." One of the companies whose bid was rejected cites this decision as evidence that NRTC was given an unfair advantage. Another company contests the process as a whole.

"A third consortium questioned the technical qualifications of NRTC in a letter to the International Tax Stamp Association: NRTC's proposed track-and-trace system is based on Codentify, software originally developed by Philip Morris International. They call Inexto a "front company" for Codentify, which they say is a "black box" controlled by the tobacco industry. As such, they maintain, it violates the terms of the treaty that mandated Pakistan implement track and trace in the first place.

"Given that the system is not open source, some observers have suggested Codentify may contain hidden features known only to the tobacco industry," the filing says. 'NRTC should be immediately disqualified as the solution offered in non-compliance with [the] World Health Organization... and [the licensing process] itself.'

"Sarwar, the FBR board member, defended the choice, saying the NRTC deal included a clause that allows the FBR to cancel it if they find any "clear and close ties [with the tobacco industry], that there's common shareholding by a parent company, or something like this."

Copyright Business Recorder, 2020