Low-priced cigarettes: IREN detects huge tax evasion in AJK

Cigarette manufactures in Azad Jammu & Kashmir (AJK) are supplying/selling huge quantity of low-priced cigarettes in Pakistan, resulting in dumping of tax evaded tobacco products, which has been detected by Inland Revenue Enforcement Network (IREN) a special task force of Federal Board of Revenue (FBR).

Sources told Business Recorder here on Wednesday that the seriousness of the matter is evident from the fact that the IREN-FBR has intercepted trucks loaded with huge quantities of tax evaded cigarettes manufactured by units located in AJK. IREN of the FBR has immediately taken up the matter with the AJK tax authorities to control dumping of tax evaded cigarettes which is a complete violation of Pakistan’s tax laws. The laws prescribe a minimum price threshold for the payment of duty/taxes. The IREN has the evidence to prove that the retail price being charged is even lower than the amount of duty/taxes payable on the saleable packet of cigarette. While the same FED/Sales Tax laws apply in both tariff areas (AJK and Pakistan), the sale below the said minimum price itself constitutes the evidence that no duty/tax has been paid on such supplies.

Sources said that surprisingly the trucks having tax evaded cigarettes manufactured in AJK traveled to Pakistan without any check by the AJK tax authorities at border areas. The IREN has observed that huge quantity of low priced cigarette is being supplied & sold in Pakistan by AJK based cigarette manufacturers. The special task force of FBR is repeatedly approaching the AJK tax authorities to stop movement of low-priced cigarettes from AJK into Pakistan, sources said.

Discreet market survey conducted by IREN in Punjab province abundantly reflects that local market is flooded with low priced/non-tax paid cigarette of AJK origin. Different retail outlets have been videotaped by IREN teams which gives real time & foolproof evidence of sale of AJK based cigarette in Pakistan below the minimum price (inclusive of duty/taxes).

Office of Central Coordinator IREN, Regional Tax Office (RTO) Rawalpindi, offers AJK tax authorities to nominate an officer/team which shall be facilitated by IREN in its verification of on ground position at any location between Rawalpindi and Lahore. This joint team can visit various retail outlets at any town; city or roadside market for verification of our assertion/reservation regarding dumping of low priced cigarette in Pakistan orchestrated by AJK based cigarette manufacturers. The IREN has the mandate to check, inspect, seize and confiscate the counterfeit or non-duty/tax paid cigarette within territorial limits of Pakistan, irrespective of its origin.

According to sources, a recent study conducted by a credible research think tank says that FBR is losing revenue over Rs 25 billion per annum and the chunk of prevailing non-tax paid segment is expanding day by day. In order to forestall this menace, the FBR has recently constituted a special task force “Inland Revenue Enforcement Network” (IREN) against illicit trade of cigarette/tobacco. This network has launched a massive campaign against all segments of non-tax paid cigarettes/tobacco in Pakistan. Moreover there is no mechanism for online verification of payment of duty/taxes on cigarettes being manufactured in AJK; therefore, for Pakistani tax authorities all AJK origin supplies remain un-vouched. In the light of foregoing AJK tax authorities and AJK Council were requested during the meetings that proper & formal liaison is required for regular communication of information/record including list of cigarette manufacturers along with schedule of machinery installed and its manufacturing capacity, complete list of Pakistan and AJK based sole agents, distributors and wholesalers of aforesaid manufacturers and payment of duty/taxes made by each manufacturer since July, 2015 till March, 2017.

As FBR is losing huge revenue on account of low-priced cigarettes flooded by AJK cigarette manufacturers, therefore an urgent & prioritized response is requested. “You would appreciate that rampant tax evasion is detrimental to the interest of both AJK and Pakistan’s tax authorities. IREN combined and synergized coordination is going to benefit both and any enforcement action by IREN (in line with our current practice in Pakistan) would rather give a boost to AJK tax revenues.”

In a recent session held of the National Assembly’s Standing Committee on Commerce, it was recommended to form a committee regarding the illegal sale of cigarettes. During the session, Minister for Commerce Khurram Dastgir brought to the notice of the Committee that illegal cigarettes are being sold in the market. He stated that there is a minimum tax of Rs 44 per pack of cigarettes, but could not understand how cigarettes are being sold for 15 to 30 rupees per packet in the market.

The illicit trade in cigarettes has risen to more than 40% of the market, where almost 2 out of every 5 cigarettes is illegal. Whereas, the consumption of cigarettes has remained the same, the illicit sector continues to grow and eat at the legitimate industry’s share and volumes. Estimates in Pakistan reveal that more than Rs 100 billion in potential revenues has been lost by Government of Pakistan in the last 5 years. In the last fiscal year alone (FY 15-16), revenue leakages, due to a thriving illicit cigarette trade, went up to the tune of Rs 45 billion. Nearly 10% of the global market is illicit and that illicit trade is significantly higher in low and middle income countries, up to 50% and more. Pakistan, a developing economy, is facing a similar dark market where illicit cigarettes are sold openly and in blatant violation of various laws.

Experts added that in case of Malaysia there is a very high illicit trade of cigarettes ie over 50 percent and tobacco companies are closing their business. Same is the situation in Pakistan where percentage of illicit trade is very high.