Illicit Cigarette Manufacturers Exploit Exports Quota to Evade Tax

Illicit Cigarette Manufacturers Exploit Exports Quota to Evade Tax

Karachi, March 28, 2024 – Cigarette manufacturers in Pakistan are finding loopholes in export regulations to evade taxes, causing significant losses to the national exchequer.

By falsely declaring their products for export while diverting them to the domestic market, these companies are not only evading retail taxes but also skirting advance tax obligations, leading to substantial revenue losses.

An industry expert, speaking on the condition of anonymity, highlighted the extent of the issue, stating, “The companies manufacturing and selling illegal cigarettes are also involved in the evasion of advance tax collected on tobacco processing.” This practice involves purchasing tobacco from green leaf threshing units ostensibly for export purposes but ultimately selling it domestically without paying the requisite taxes.

Government sources at the Federal Board of Revenue (FBR) acknowledge the problem and have intensified efforts to clamp down on illicit cigarette sales. “The FBR has tightened enforcement to curb illicit sales of cigarettes in order to ensure substantial rise in revenue,” revealed an official at the Large Taxpayers Office (LTO) in Karachi. Despite these efforts, the scale of tax evasion remains significant.

To monitor and regulate the production and sale of cigarettes, the government has imposed an advance tax of Rs 390 per kilogram on tobacco purchased from green leaf threshing units. This tax, which is adjustable and doesn’t burden tobacco farmers directly, aims to bring manufacturers into the tax net and deter illicit activities.

However, statistics from the Pakistan Tobacco Board and the State Bank of Pakistan reveal glaring disparities. While the Pakistan Tobacco Board recorded 22.3 million kilograms of tobacco worth 65.2 million dollars purchased for export during the financial year 2021-22, State Bank statistics on tobacco exports amounted to only 56.9 million dollars. This significant difference suggests that a substantial portion of tobacco meant for export is diverted to the local market.

It’s estimated that over 90% of tobacco purchased by certain manufacturers is sold domestically without proper taxation, resulting in an annual loss of approximately 4 billion rupees in advance tax alone. When combined with retail tax evasion, the overall revenue loss balloons to an estimated 80 billion rupees annually.

Experts emphasize the urgency of addressing these issues, stating that curbing tax evasion could significantly alleviate the budget deficit. The recovered revenue could then be redirected towards alleviating inflationary pressures and improving infrastructure, ultimately fostering socio-economic development in Pakistan.

Efforts to combat illicit cigarette sales and tax evasion are ongoing, with authorities striving to close regulatory loopholes and hold accountable those responsible for depriving the nation of vital revenue.