Lahore—The Federal Board of Revenue (FBR) is taking the initiative to implement tax stamps with the aim of curtailing tax evasion in the cigarette industry. In 2014, the illicit cigarette sector made up 23.7 percent of the market – a number that continues to alarm the legitimate players in the industry who are left to face the increasing tax burden. The illicit sector includes smuggled cigarettes, counterfeit products, and Local Tax Evaded (LTE) cigarettes.
In a research report compiled by Nielsen Pakistan, Local Tax Evaded (LTE) cigarettes cost the national exchequer around Rs25 billion in lost revenue annually. LTE cigarette brands are priced as low as Rs15, which is indicative of clear tax evasion given that the minimum tax payable per pack is around Rs36. These LTE brands are produced in factories located in Khyber Pakhtunkhwa and Azad Jammu & Kashmir where manufacturers declare a small portion of the amount of cigarettes produced and hence end up paying a fraction of the amount of their actual tax liability. There is a strong need to clamp down on these LTE brands as they are threatening the tax compliant players in the industry.
With Pakistan taking the step towards implementing tax stamps, it will be joining the ranks of nations like the Philippines and Malaysia, who have successfully introduced different technology to curtail their respective illicit trade issues. Since 2015, the Philippines’ Bureau of Internal Revenue (BIR) has implemented the Internal Revenue Stamps Integrated System (IRSIS), a track-and-trace system deployed with the sole focus of limiting illicit trade.
Under the BIR’s Revenue Regulation No. 9-2014, all locally made and imported cigarette packs mus bear tax stamps before they are sold in the market. Each revenue stamp is sold for 0.13 Philippine Peso (0.0028 US Dollar), a payment which goes to the state-run printing services firm, APO Production Unit Inc. No sale will be made unless the excise tax due on the total stamps has been paid first. Failure to claim the stamp tax at the scheduled date of release authorizes the APO to charge the concerned parties reasonable stamp storage fees. Tax code offenders can face jail time of up to eight years and a fine of over $1,000 for not using tax stamps. The BIR has also recently stated that on-the-spot surveillance of cigarette products would be conducted either in the place of production, storage facilities or in the retail market to monitor compliance.
LTE cigarettes, unlike smuggled cigarettes, usually comply with all the local printing requirements, making it extremely difficult to different them from the cigarettes made by the legitimate players in the industry. The introduction of such a visual marker in Pakistan would allow law enforcement officers to monitor the trade of LTE cigarettes. Although the Philippines is a recent example of a country adopting technology to curb the sale of illicit cigarettes, Malaysia introduced an ink security marking system in 2004.
Following the introduction of ink marking, the illicit tobacco trade in Malaysia fell by four to five per cent of total cigarette consumption. Furthermore, tax revenues nearly doubled in the year after the introduction of the ink security marking. Pakistan already has the service provider and technology to implement such tax stamps.
Like the Philippines’ APO Production Unit, the Pakistan Security Printing Corporation (PSPC) has the authority to print revenue stamps and tobacco excise labels under the Supply and Distribution of Stamps rule 1954. It already has a portfolio of printing banknotes, machine readable passports/visa, government cheques and other high quality anti-counterfeiting products making it a front runner to print the tax stamps. However, it has to be said that together with the implementation of tax stamps, it is important that retailers are held strictly responsible for selling any cigarette packs without the affixed tax stamp. Stricter penalties at the ultimate stage of the supply chain would guarantee a decline in the sales of LTE cigarettes in the country and generate due revenues for the government.