Tax Evasion in Tobacco Sector

The FBR collected Rs 135 billion in taxes from the tobacco sector during the financial year 2020-21, Rs 18 billion more than the tax collected from the tobacco sector previous year.

In the federal budget 2021-22, the target for tax collection from the tobacco sector has been set at Rs 155 billion, which is Rs 20 billion more than the financial year 2020-21.

It is pertinent to mention that two companies who bought around 71% of tobacco crop (33 million Kg out of 45.6 million Kg) in 2020, contributed to 98% of the tax while 48 companies who bought 29% only contributed the remaining 2%.

According to IPSOS, an international economic and industrial research organization, taxes worth Rs 80 billion are being evaded annually from the tobacco sector in Pakistan.

According to tax experts, the actual tax collection from the tobacco sector could be increased by Rs.80 billion by levying tax according to the actual production and sales figures of all 52 cigarette manufacturing companies in Pakistan.

There is a need to monitor the production units of companies manufacturing and selling cigarettes with a track and trace system to prevent heavy tax evasion from the tobacco sector.

The tobacco industry had proposed to the government before the federal budget last year to levy a tax on tobacco threshing instead of selling cigarettes, which did not get the government’s attention.

The tobacco industry shares demand for tobacco at the beginning of each season, which is advertised for tobacco growers. Once the crop is bought, all of it is processed through 10 green leaf threshing units in the country.

Experts believe that if tobacco can be taxed at that stage, it can eliminate the massive tax evasion in the sector. The monitoring of these 10 threshing plants is easier and scalable as compared to monitoring of more than 50 companies’ production and sales..

Luckily, a monitoring system for green leaf threshing plants already exists which may be improved by using digital technologies.

This SRO 1149 authorizes the FBR to appoint an Inland Revenue Officer to oversee threshing plants, who will monitor and verify tax receipts, along with tobacco processing, storage, waste and sale of tobacco to non-manufacturers. Green leaf threshing plants are also required to submit details of daily threshing, storage, waste, supply of tobacco and applicable levies to the commissioner on a monthly basis.

Previous efforts to increase advance taxation during GLT phase from PKR 10 to PKR 300 have all fallen flat due to a strong resistance from local tobacco manufacturers, few of whom are part of the Government as well.

It is pertinent to mention that according to the Pakistan Tobacco Board, this year, 61 tobacco companies will buy 56.485 million kg of tobacco this year, of which the top two companies have a market share of 71.5 per cent, while 59 companies together will buy 28.5 per cent.

Experts have urged the Government to counter the tax evasion in the tobacco sector which is not only denting the economy but also undermining the tobacco control initiatives of the Government.

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