Smuggling/counterfeit cigarettes: government suffers over Rs 90 billion loss annually

The Directorate General Intelligence and Investigation Federal Board of Revenue has detected annual revenue loss of over Rs 9.5 billion due to smuggling/counterfeit cigarettes and recommended continuation of federal excise duty (FED) on filter rods, levy of adjustable FED @ Rs 100 per kg on services rendered by green leaf thrashing plants, ban on export of filter rods to Afghanistan and cigarette''s raw material be placed on Negative List of Afghanistan Pakistan Transit Trade Agreement (APTTA).
Sources told this scribe on Monday that Task Force headed by Mohammad Riaz Director General Intelligence & Investigation - FBR has submitted a report on cigarette sector to the Board. This is the first of its kind comprehensive report, which has not only detected loopholes in cigarette industry, but also proposed legal and procedural measures to check smuggling and production of counterfeit cigarettes.
Different Regional Tax Offices have taken enforcement actions on the report of the directorate to check evasion of sales tax and the FED in the cigarette industry in Khyber Pakhtunkhwa and other areas. The Task Force has also conducted surveys and collected data from various sources to recommend legal changes in tax laws after research/analysis through physical inspections in KPK and Azad Jammu and Kashmir (AJK).
The FBR will use this report as an effective tool to improve documentation of the cigarette industry, which will also be instrumental in checking smuggling and counterfeiting. According to the Task Force, it was observed that non-documentation of two major inputs of cigarette industry ie filter rods and un-manufactured tobacco and smuggling of other raw materials ie filter paper, tipping paper etc goes a long way in manufacturing of non-duty paid and counterfeit cigarettes.
The major risk areas in cigarette industry have been identified as easy availability of locally manufactured, un-documented raw materials and Afghan Transit Trade. The report has identified and rectified lacunas in law, enforced drive against non-compliant manufacturers, smuggled/counterfeit cigarettes.
Task Force has strongly recommended immediate registration of all distributors of cigarette industry and audit of their record may be carried out on regular basis. Secondly, the forensic audit of all cigarette manufacturers may be conducted regularly on annual basis; however, the audit should not be limited to the record of federal excise and sales tax available or provided by the units. The scope of audit should include the entire business process of the industry right from declaration regarding purchase of tobacco to supply of cigarettes. Without audit of supply chain of raw materials it is very difficult to detect evasion by the cigarette manufacturers.
In order to check entry of non-duty paid / counterfeit cigarettes from AJK into Pakistan, the new entry points may be notified as authorised routes for movement of cigarettes and check posts may be established at Gujrat, Sarai Alamgir, Dina and Hazara, etc.
Moreover, AJK Council may be taken on board by FBR regarding the concerns and measures taken to minimise evasion of revenue in cigarette sector. AJK Council may be requested to pursue Sales Tax Department of AJK to share data/information of cigarette industry ie active units, installed and production capacity, distributors of each cigarette manufacturer in AJK and Pakistan, purchase of raw tobacco, receipt of un-manufactured tobacco, production and clearance data, sales / supply within AJK and to Pakistan, on regular basis.
The Task Force was of the view that the monitoring of GLTs, cigarette and filter rod manufacturing facilities by posting staff of IRS under section 45 of the Federal Excise Act, 2005 and section 40B of the Sales Tax Act, 1990 is not a permanent solution to check evasion through clearance of non-duty paid cigarettes. One of the options for monitoring the manufacturing activity is installation of CCTVs under sub-section (3) of section 45 of the Federal Excise Act, 2005 and satellite monitoring system. The Task Force discussed the issue with the cigarette manufacturers who did not support the idea. However, in order to monitor the manufacturing activity, the Board may issue directions for installation of CCTVs as well as satellite monitoring system at the premises of GLTs, cigarette and filter rod manufacturers.
The Task Force recommended various amendments in the tax laws. The FED imposed on filer rods for cigarettes should continue at the rate of Rs 1.0 per filter rod. With decrease in rate of FED the objective of imposition of FED on filter rods will not be achieved. Moreover, physical monitoring of two independent filter rod manufacturers by staff of IRS under section 40B of the Sales Tax Act, 1990 may continue to ensure that no consignment of filter rods is supplied without charging leviable Federal Excise Duty.
The Task Force further recommended adjustable FED @ Rs 100.00/kg may be levied on the services rendered by Green Leaf Thrashing Plants by inserting the same in Chapter 98 of First Schedule to the Customs Act, 1969 and Table II of First Schedule to the Federal Excise Act, 2005. Moreover, physical monitoring of stand alone GLTs by the staff of RTO, Peshawar, under section 45 of the Federal Excise Act, 2005 may continue to ensure that no consignment of un-manufactured tobacco shall be supplied without charging leviable FED. Accompanying of original invoice with the vehicles carrying cigarettes from distributors to wholesales/retailers may be made mandatory through an amendment in SRO 217(I)/2010.
In order to discourage smuggling of foreign origin cigarettes the same may be notified under section 2(s) of the Customs Act, 1969, Task Force added. The Task Force is of the considered opinion that leakage of revenue in cigarette sector can only be checked with co-ordinated efforts of all field formations of FBR. Strict physical monitoring of filter rods manufacturing units located in Karachi and Hub, under section 40B of the Sales Tax Act, 1990, by RTO, Karachi and RTO, Quetta can check use of filter rods for manufacturing of non-duty paid and counterfeit cigarettes.
Similarly, strict physical monitoring of GLTs under section 40B of the Sales Tax Act, 1990 by RTO, Peshawar can check use of un-manufactured tobacco for manufacturing of non-duty paid and counterfeit cigarettes. In the same way MCC, Peshawar and Quetta will have to be more vigilant to check smuggling of raw materials and foreign origin cigarettes from Afghanistan into Pakistan.