Pakistan: Audit of GLT Units to Reveal Quantum of Tobacco Industry Tax Evasion

Source from:  Business Recorder (pk) 03/10/2016

The effective audit of Green Leaf Threshing (GLT) units by the Federal Board of Revenue (FBR) would reveal quantum of sales tax/Federal Excise Duty (FED) evasion in the cigarette industry. Experts told Business Recorder here on Tuesday that all the cigarette manufacturers get their most important ingredient, ie, tobacco within the country.

Pakistan annual tobacco production is enough to cater for all the cigarette manufacturing units. Thus all the cigarette type green leaf tobacco is sent to a handful of Green leaf threshing (GLT) units operating in Pakistan which, if carefully scrutinised can easily reveal the quantum of evasion in the cigarette industry. While the tax authorities have many ways to ascertain the quantum of production and tax evasion by a manufacturing unit, the scrutiny of the inputs used in the manufacturing process. In cigarette industry case this input can be threshed tobacco.

Alternatively, other areas of the tobacco industry supply chain can also be scrutinized but there may be more complexity involved due to their huge size. For example there are more than 75,000 farmers that grow tobacco that is later used by 50 plus manufacturers to make cigarettes. Thousands of consignment vehicles then distribute these cigarettes to a retail universe of more than 600,000 outlets all over the country. Monitoring tax compliance in such a vast network might seem daunting. Focusing on the narrowest link in the entire supply chain: the 7 to 8 green tobacco threshing units that provide tobacco used for making cigarettes may therefore be the best way forward.

They said it is not just the smaller quantum of the threshing units that makes them a good point of enforcement. In fact, the amount of threshed tobacco purchased can be used to estimate the total production of the tax-evaded cigarette manufacturers as well. Green tobacco is like the concentrate used in beverages: if you know the quantity of concentrate supplied, you can easily calculate the quantity of beverage bottle produced later.

According to a recent research published in 2015, 16 percent of the tobacco crop produced annually in Pakistan is purchased by manufacturers of local tax-evaded cigarettes. The average annual tobacco crop production in Pakistan between 2009 and 2014 was around 117 million kilograms. This means around 18 million kilograms of tobacco crop is annually purchased by manufacturers of local tax-evaded cigarettes, although the same is not declared by them in order to avoid the tax net.

They pointed out that one kilogram of tobacco crop is used for manufacturing approximately 1,250 cigarettes, according to the said published research. The 18 million kilograms of tobacco crop is thus enough for manufacturing 19 billion cigarettes annually, which as per the report was the estimated sales volume of local tax-evaded cigarettes in 2014. The law requires all tobacco green tobacco threshing units that sell un-manufactured (threshed) tobacco to cigarette manufacturers to issue a tax invoice.

The law also requires them to deduct adjustable excise duty of Rs 10 per kilogram of un-manufactured (threshed) tobacco sold by them. Green tobacco threshing units are also required to file a monthly return declaring their sales. If these laws are strictly enforced, tax authorities can easily determine the total volume of un-manufactured tobacco (threshed raw material) used by each cigarette manufacturer.

Many of the threshing plants, however, neither fully declare the actual quantities of tobacco threshed by them nor furnish accurate details of their customers for whom the tobacco has been threshed. This allows local tax-evaded cigarettes manufacturers under-declaration of volume of cigarettes (final taxable product) manufactured by them, which ultimately helps in tax evasion and makes it extremely difficult for Government authorities to carry out any reconciliation.

Earlier, Directorate General Intelligence and investigation IRS reportedly raided a cigarette filter manufacturing unit and seized all its record for evidence of tax evasion. This shows that the Government is also of the view that in order to detect evasion in the tobacco sector the inputs have to be monitored effectively. Like the green tobacco threshing units, there are only a handful of manufacturers that produce cigarette filter-rods monitoring of which is easier.

The monitoring of the Green leaf threshing units and conducting regular audits of these units would help tax authorities in gathering the requisite evidence to hold local tax-evaded manufacturers responsible in paying their actual tax liability. Such a bottoms up approach would not only make the manufacturing process more transparent, but would cut the illicit supply chain in its roots before it evolves into an elaborate network eroding the economy one cigarette at a time. The tax evasion in cigarette sector causes the exchequer an estimated loss of more than Rs 24 billion annually. Enditem