ISLAMABAD - The Federal Board of Revenue (FBR) is in the process of plugging loopholes in checking tax evasion by un-registered tobacco units following increase in the sales of tobacco to tax-evading cigarette manufacturers, causing huge loss to the national kitty.

Sources told The Nation here on Tuesday that coordination between the FBR and Pakistan Tobacco Board (PTB) would help in checking tax evasion at the first stage of purchase of tobacco by unregistered manufacturing units.

Directorate General of Intelligence and Investigation Inland Revenue (IR) has reportedly taken many steps, including carrying out raids on sellers of non-duty paid brands of cigarettes in the country.

PTB has most effectively helped regulate the process for the legitimate tax-paying industry. However, as per latest government estimates, the tobacco industry has declined, whereas the quantum of tobacco crop remains more or less the same.

This shows that sales to tax-evading cigarette manufacturers have been increasing through the black market that have left farmers exposed to exploitation in terms of delayed payments, and has also subjected the national kitty to tax losses of billions of rupees.

It then becomes critical to find out how these duty-evading units are bypassing the stringent controls put in place by the PTB to ensure farmer’s interests.

Therefore, while commendable work has been done for regulating the legitimate industry, it is now time that PTB works to protect the local farmers from falling prey to the growing black, tax-evading cigarette market.

It has been learnt that PTB has the mandate to regulate the production and marketing of this crop. Fair trade and welfare of the farming community is therefore critical to ensuring a stable supply.

As the regulatory watchdog for tobacco cultivation, PTB has developed a sound infrastructure to ensure justice and fair-play in transactions among farmers, manufacturers and dealers.

This five-step regulatory system is aimed at protecting the interests of growers, regulating dealers, stabilising price fluctuations and ensuring availability of quantity and quality of crop required by the cigarette manufacturers.

“All aspects of the supply chain are regulated to ensure that the system is free from exploitation,” sources said.

PTB has put in place five key mechanisms for the protection of farmers’ welfare like minimum support price, mandatory purchase of surplus crop by manufacturers and timely farmers’ payments.

The regulations also make it obligatory on the cigarette manufacturers to purchase all these indicated quantities, irrespective of any changed circumstances at the time purchases commence in summers next year.

The tax-evading units rarely participate in the exercise wholeheartedly so as to prevent their records from being checked for tax collection purposes. It is key to note here that as per the PTB bulletin, 18 companies bought tobacco. However, as per research estimates by Nielsen (global research company), more than 45 companies are manufacturing cigarettes in the country.

Secondly, under Section 8 of PTB Ordinance 1968, a Minimum Support Price for tobacco crop is fixed annually by the Government of Pakistan.

According to a research by Nielsen, in reality tobacco farmers are always paid a price by the legitimate, tax-paying industry higher than this fixed Minimum Support Price

Thirdly, a unique protection that is available only to tobacco farmers is Clause 4 of Martial Law Order 487 of 1985, which says that ‘the weighted average price of tobacco, for the crop of any year to be paid by the tobacco company to the growers, shall not be lower than the weighted average price paid to them for the crop of the immediately preceding year.

Fourth, cigarette manufacturers are required to buy even the surplus crop, over and above their requirements indicated to PTB the previous year.

Rule No 8 of Tobacco Marketing Control Rules, 1993 , issued under Martial Law Order 487 of 1985, states that ‘no tobacco company or tobacco dealer shall close its purchase depots or business premises till such time it has purchased its full targeted demand of various types of tobacco. In case of surplus production, the additional quantity of particular type of tobacco may be allocated by the Board to the individual tobacco companies /dealers proportionate to their purchase target.’

Finally tobacco farmers get payments immediately for their crop because of an efficient purchasing system in place.

Contrary to the practice in vogue with respect to many other crops, where unfortunately complaints of late payments to growers are routine, tobacco farmers get their payments within 7 to 30 days of sale.

During 2013 alone, within a short period of 8 to 10 weeks, the tobacco industry contributed approximately Rs15 billion to the national economy through its purchase of tobacco crop from thousands of farmers.

As these payments to farmers are made through formal banking system, unlike with local tax-evading units, this also contributes to the development of banking sector in the relevant areas.

“While the PTB has put in place many mechanisms to ensure a level-playing field, more efforts are required for the documentation of tobacco crop purchases, as already envisaged by law, because it will help curtail manufacturing of illicit cigarettes in Pakistan and also increase government revenues from the cigarette industry,” they added.