How the tobacco mafia in Pakistan steals billions from the exchequer

Cigarette manufacturers across the country are evading millions of rupees in taxes through fraudulent methods in connivance with government officials, opposition members, and individuals of investigative agencies, it was revealed on Thursday. 

According to an investigative report aired by Geo News on Aaj Shahzeb Khanzada Kay Sath, cigarette packets are being sold at lower prices than the minimum possible price set by the Pakistan Tehreek-e-Insaf (PTI) government through the introduction of new taxes this year. 

Officially, the lowest cost of a packet of cigarettes is fixed at around Rs63, from which the tobacco companies are bound to pay at least Rs42 in taxes to the government, but instead the cigarettes are being illegally and openly sold for Rs30-40 per packet in major cities across Pakistan.

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Tobacco companies are openly flouting the new tobacco regulations introduced by the government this year, and despite specifying new prices on cigarette packets, are still selling the packets at prices of last year, or even lower, the report reveals. 

The collusion of influential industrialists and politicians, including ones from the PTI government at the centre and the Khyber Pakhtunkhwa province, as well as officers from investigative agencies, has made the tax evasion possible, and cost the national exchequer billions. 

Prime Minister Imran Khan seems unaware of these fraudulent methods, as he has on several occasions expressed the desire to tax the tobacco industry, and it is in part due to the efforts of the premier that new taxes were levied on the tobacco sector to generate much-needed tax revenue.

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“Only two [tobacco] companies pay 98 percent of total tax [tobacco collection],” PM Imran said on Thursday [October 17] after launching the first phase of the Kamyab Jawan Programme for youth across the country to support them through technical and financial assistance.

“Remaining companies producing 40 percent cigarettes in the country only contribute 2% tax revenues to the national kitty.” He voiced the same concerns in his speech on February 20, 2019. 

“Two tobacco companies pay 98% taxes with their 60% market share. The remaining 40% companies pay meagre 2% tax,” the prime minster had said eight months back.

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Powerful PTI members involved in tobacco fraud

Geo News report mentioned that powerful members of the PTI, who own factories that manufacture seven different brands of cigarettes sold in local markets, are involved in tax evasion imposed on them by their own government. 

The members are alleged to be senior Senator from the PTI, as well as a government minister in the KP provincial administration. The cigarettes sold by these seven brands account for at least 2% of the market share in the tobacco industry, suggest conservative estimates. 

The report further claims that the PTI members have pressured the government to overlook their tax evasion with the help of their own influence, as well as the influence of opposition politicians working as partners with them, and officials from different investigative agencies. 

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The influential group also coerced the government into reversing a decision to levy tax on tobacco farmers, saying it put too much burden on the ordinary farmers, and pledged to pay the tax themselves, being tobacco manufacturers.

However, in doing so, they convinced the government to reduce the amount of tax it levied per kilogram. A Rs300/kilogram levy that the tobacco farmers had to pay under the new law introduced by the PTI government was slashed to Rs10 on the request of these officials.

How much is a cigarette packet worth?

In the report aired by Geo News, Khanzada pointed out that under a new law, the price fixed for 1,000 cigarettes of expensive brands was Rs 5,960 which came to Rs5.96 for a single cigarette. According to this formula, a 20-cigarette packet must be sold for Rs119, which would have a duty of Rs104.

Meanwhile, 1000 cigarettes selling for “less than” Rs5,960 would be considered the cheaper varieties. This way, 20 per packet cigarettes, selling for “less than” Rs119, would fall in the cheaper category. In the cheaper category, the companies were bound to pay Rs1,650 as duty for 1,000 cigarette, which came to a duty of Rs1.65 for a single cigarette and a tax of Rs33 duty would be paid on a 20 cigarette packet.

The government had already fixed the minimum price of cigarette. Under the law, cost of any cigarette brand inclusive of sales tax would not be less than 45 per cent of the retail price mentioned in column 2.

According to column 2 the cost of the expensive brands came to Rs119 for a 20-cigarette packet. The tax of Rs53.64ps formed 45 per cent of that amount. Besides, a 17 per cent sales tax was also imposed on a packet, which came to Rs9.12 tax per packet. The cigarette companies under this formula had to pay a duty of Rs33 per packet and Rs9.12 as tax.

Any cheaper brand could not be sold for less than Rs62. 76ps under the law.

Taxing tobacco farmers

According to the report aired by Shahzeb Khanzada, there are several companies in the country involved in the tobacco business – some manufacturing legally, while others engage in illegal activities to do so. The policy of taxing tobacco farmers was aimed at countering illegal production of cigarettes.

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The tax, fixed at Rs300/kilogram at Green Leaves Threshing Plants, was introduced by former finance minister Asad Umar. Previously, this tax was worth Rs10/kilogram. By targeting tobacco farming, the tax shortfall from tobacco manufacturers could be bridged.

Many tobacco manufacturers also own tobacco farms, so this was also an indirect way of taxing the tobacco industry that evaded millions in taxes each year. The new tax by the PTI government was adjustable and refundable if claimed, Geo News revealed.

The adjustments were meant to encourage tobacco farmers to document their true production to the government, so that it could ascertain how much tobacco was being produced in Pakistan every year. Data collection would help in taxing the tobacco industry more efficiently.

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Pakistan produces 70 million tonnes of tobacco annually, according to an estimate. Of this, 43 million tonne is purchased by the formal sector. The remaining 27 million tobacco goes undocumented, consequently, no tax revenue is collected against it.

By taxing tobacco farmers, the PTI government went right to the source of tobacco production. The report further said that although there were thousands of tobacco growers in the country, and dozens of cigarette manufacturing companies, only ten leave processing plants existed.

The new tax on leave processing plants made it difficult for tobacco manufacturers to evade taxes, as the government has accurate figures for tobacco production of these firms. The PTI government could generate tens of millions in additional taxes this way, experts claimed. 

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The meeting of power officials from PTI

The report aired by Geo News says that the tobacco mafia pressured National Assembly Speaker Asad Qaiser, a lawmaker from KP, who constituted a 'special' committee to look into the matter of new taxes imposed on the cigarette manufacturers.

A meeting of that committee was held on June 13 this year, and was attended by PTI lawmakers from both the national and provincial legislatures. Senior ministers like Economic Adviser Hammad Azhar and Federal Board of Revenue Chairman Shabbar Zaidi also attended.

During the meeting, the government was called upon to provide relief to the hundreds of tobacco growers. The politicians tried to create the impression that the tax was to be paid by the cultivators. The same was penned in the statement issued after the meeting.

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In the statement, the politicians urged the FBR to take into account the ‘political economy’ of the tobacco-growing areas. When contacted by Geo News on June 25, the FBR chief said the government had acceded to the demands of the tobacco manufacturers.

“The government hasn’t caved in to the pressure it faced from the tobacco companies. The principal reason is that I have complete backing of PM Khan and Hammad Azhar,” Zaidi told Geo News. “Mr Speaker [Asad Qaiser] didn’t pressurize us. He was just concerned that the cultivators will be additionally burdened with the tax.”

Zaidi said he reassured the participants of the meeting that the relevant law had been amended and that the new tax would now be paid by the cigarette manufacturers alone, not by the tobacco growers, in accordance with the new law.

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However, Economic Adviser Hammad Azhar withdrew the tax and reversed it to the previous Rs10 afterwards. The federal government specified the tax details on every item in the Finance Bill, which is released to the public every year.

Caving in to the tobacco mafia

Winding up the debate on Finance Bill 2019-20 at the National Assembly on June 25, Hammad Azhar said, “To facilitate the farmers, the Rs300 levy has been reduced to Rs10/kg.” 

He said the government, of its own accord, had imposed Rs300 levy, expecting the levy on leave processing plants would pay the tax on part of the tobacco companies. 

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However, he added, it came to the government’s notice that when the tax was practically imposed, the tax burden was shifted to the poor farmers. Azhar said it triggered negative impact on our agriculture, accordingly, the tax was reversed.

When questioned by Geo News on July 30 this year, the former finance minister Asad Umar said, “I am not privy to the details. Hammad was overseeing all the process.”

Khanzada wrapped up the programme by underlining the fact that if the PTI government had stuck to its guns and had brought all the illegal cigarette manufacturers into tax net it would have brought Rs35 billion to the government coffers. 

"But the government could not withstand the pressure and now the prime minister laments that the tobacco sector evades taxes," the anchor noted.