ISLAMABAD: While the anti-tobacco advocates accuse the cigarette industry of being involved in tax evasion, a new study has given a number of recommendations to increase the revenue from this industry.

The study titled: ‘Quantifying the Potential Tax Base of Cigarette Industry in Pakistan’ was conducted by Social Policy and Development Centre (SPDC), and funded by the University of Illinois at Chicago’s (UIC) Institute for Health Research and Policy.

According to the study, at present federal excise duty (FED) is collected at factory level on declared production. If the FED is linked with general sales tax (GST) collection and the GST is collected in value added tax (VAT) mode, it will help reduce tax evasion. GST should be collected at factory, distributors and wholesalers and retailers level.

“While Federal Board of Revenue (FBR) is already in the process of implementing a system for electronic monitoring of production, the implementation process should follow the existing best practices particularly from developing countries. FBR should also monitor tax evasion by analysing the financial data of the companies. Such analysis will help build a robust tax collection mechanism for future,” it suggests.

“Analysis of monthly data reveals that the production is generally high during the months before the announcement of federal budget. This is largely an outcome of uncertainties in tax policy. A medium-term tax policy guideline should be followed to avoid major changes in tax rates,” it states.

Study alleges that the tobacco firms usually argue that higher FED causes a decline in their sales and profitability. However, the analysis reveals that from 2015 to 2017, when tobacco firms reported a decline in their production, profit margins remained substantially higher compared to the previous years.

“For instance, during 2010 to 2014, gross profit margins of two companies averaged about 32pc and 28pc; and substantially increased afterwards. In fact, in 2017 – a year of substantial decline in production – profit margins were 47pc and 36pc,” it states.

In absolute terms, the estimated production in 2016-17 is around 50.5 billion sticks whereas the declared production was only 34.3 billion sticks, resulting in under-reporting of 16.2 billion sticks. Similarly, estimated under-reporting is 15.6 billion sticks in 2017-18.

Representative of an organisation Campaign for Tobacco Free Kids Malik Imran, while talking to Dawn, said that it was a fact that in Pakistan tobacco industries avoid the taxes.

“Unfortunately players are so influential, across the globe especially in developing countries, that they even dictate the policies. If the recommendations of the study would be implemented, the revenue would be increased and it can be used for the betterment of the society and on health of our future generation,” he said.

Media coordinators of both tobacco companies were contacted and study was also shared with them but they did not respond till filing of this story.

Published in Dawn, February 19th, 2020