FBR plans to introduce procurement tax labels to tackle illicit tobacco trade

To tackle the issue of illicit tobacco trade in Pakistan, Federal Board of Revenue (FBR) has planned to introduce Procurement Tax Labels and Supervision System, but the solution being favoured through the tendering process has already proven a failure in tackling the issues in many countries of the world.

A glance at worldwide experience shows that the proposed system implemented in different countries like Malaysia, , Brazil, Turkey and in some states of USA could not deliver the desired result as the paper-based stamps proved to be ineffective in addressing illicit trade challenges of today.

It is an established fact that the paper based stamps are generally very expensive and require a high capital investment, can easily be lost, stolen or counterfeited and require a complex process of manufacturing, distribution, storage and application.

In Malaysia the fact and figures clearly indicate that despite having the same system implemented in the country, government’s objective of tax collection undermined by illicit cigarette trade and counterfeit cigarette continued to grow in Malaysia. After implementation of Procurement Tax Labels and Supervision System in 2004 the incident of illegal cigarettes jumped to 24 percent in 2007 from 20 percent in 2002.

In the USA, the State of Indiana rejected the use of this system following the experience of the state of California where the incidences of smuggling and counterfeit cigarettes have not been stopped despite the use of the encrypted tax stamp system.

The experts in the State of Indiana rejected the system because they were convinced that this System cannot track and trace the product throughout the several stages of the supply chain (wholesalers/distributors, retailers, and consumer).

While reviewing the case study of the state of California, that fully implement an encrypted stamp program, experts indicated that the conversion to encrypted stamps has not reduced contraband cigarette sale or increased excise tax collection, while costing the state and wholesalers millions of dollars.

The above mentioned examples are enough for FBR or anyone else to understand that using tax stamps applied to cigarette packs during the manufacturing process is costly and not necessarily secure and effective as paper stamps can easily be mimicked by counterfeiters.

Sources in FBR confirmed that many such case studies have been put before the decision making authorities, by different stake holders urging them to review their earlier plans to make way for more modern and effective solutions in the tendering process.