Illegal tobacco sales, a double whammy for Pakistan’s economy?

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tobacco illegal sales in pakistan
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A significant case of tax evasion has been uncovered as certain companies breach tobacco export limits, resulting in substantial financial losses for the country.

Companies involved in producing illegal cigarette brands are dodging taxes at the retail level, causing considerable harm to the national economy by exploiting the guise of exports.

Experts highlight that these companies, engaged in the manufacturing and sale of illicit cigarettes, are inflicting damage on the national treasury of Pakistan by evading advance taxes during tobacco processing. While the intention is to export the tobacco, a significant quantity finds its way into the local market without the required advance tax payment.

To curb the production of illegal cigarettes and ensure taxation, the government has imposed an advance tax of Pakistan Rs. 390 per kilogram on tobacco purchased from green leaf threshing units. However, this tax is not being collected, enabling cigarette manufacturers to evade their tax responsibilities.

Data from the Pakistan Tobacco Board reveals that during the fiscal year 2021-22, 52 cigarette manufacturers acquired 22.3 million kilograms of tobacco from green leaf threshing units, amounting to $65.2 million. Among these, three organized industry companies procured 12.39 million kilograms worth $53.4 million, while 49 other manufacturers purchased 10 million kilograms worth $11.8 million.

Approximately 90 percent of the tobacco acquired by these 49 manufacturers is believed to have been sold in the local market without tax payment, resulting in a substantial loss of Rs 4 billion to the national treasury in advance taxes alone.

Discrepancies between data from the Pakistan Tobacco Board and the State Bank of Pakistan suggest that not all the tobacco purchased from green leaf threshing plants for export is genuinely exported. During the same period, the Pakistan Tobacco Board claims that 22.3 million kilograms of tobacco, worth $65.2 million, were bought for export. The difference in these figures closely corresponds to the value of tobacco bought for export but unlawfully sold domestically, evading taxes.

Experts assert that companies involved in the illegal cigarette trade are engaging in double tax evasion. They avoid paying taxes when purchasing tobacco and also circumvent duties and taxes at the retail level. This dual evasion results in an annual loss of 80 billion rupees to the national treasury.

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