Board-in-Council acknowledged that the introduction of the third tier (third slab) of federal excise duty (FED) on cigarettes in 2017-18 has resulted in increase of Federal Excise Duty (FED) from the documented cigarette manufacturers with estimated taxes of Rs 90-92 billion by end of current fiscal year. The third tier (third slab) of FED on cigarettes has not resulted in revenue loss, but increased FED collection from the from the documented cigarette manufacturers in 2017-18. Due to this third tier and it's effective enforcement illicit volumes and market share has declined which is why a campaign has started against the measures taken by FBR.
A senior FBR official on the condition of anonymity said that no internal inquiry has been initiated against tax officials or multinational cigarette manufacturing companies and no such decision has been taken in the Board-in-Council. Moreover, no such inquiry committee has been formed. Board-in-Council only discussed speedy implementation of the trace and trace system for excisable commodities, he added.
Board-in-Council of the Federal Board of Revenue (FBR) decided to ensure speedy implementation of the track and trace system of the tobacco sector to avert annual loss of Rs 70 billion in the national exchequer. However, no inquiry has been initiated against two multinational cigarette manufacturing companies in the last Board-in-Council meeting.
According to the FBR, the Track and Trace System is a digital solution whereby the production of goods is digitally monitored in near real time. In order to check the evasion of duty and taxes, the revenue authorities around the world are using this system.
The effectiveness of the system is a proven revenue generating measure wherever it is installed, the FBR said. The FBR said that almost in all the European and Far Eastern and even in some African countries, the system is installed to monitor the excisable goods specially liquor and tobacco.
The broader contours of the Track & Trace System revealed that the semi-visible security features shall be available to the wholesalers and distributors and the field formations shall be able to authenticate the genuineness of any tax stamp.
The broader contours of the Track & Trace System also revealed that the system would ensure full government control and monitoring of production lines and systematic authentication and validation of unique codes for each manufactured products.
Track & Trace System would ensure systematic recognition and verification of stock keeping units and real time collection of production data and actualized consolidated transmission to the Federal Board of Revenue (FBR).
Track & Trace system would also ensure uninterrupted and autonomous data collection on production lines and non-intrusive equipment with no impact on production speed and production capacity. Track & Trace System would ensure encrypted communication with central database, remote monitoring of tax stamps application equipment, inspection through handheld wireless electronic devices and online activation of codes.
Track & Trace system would ensure provisions of consumer authentication through smart phones, automated forecasting of tax revenues, production control reports, risk assessment, behaviour and compliance management. Under the Track & Trace system, the database shall be designed with backup mirror sites, disaster recovery plan and redundancy for data protection and database shall collect automatically all production carrying the tax stamps, and the field inspection data.
For the technology based solution for improving tobacco tax revenue, the FBR said that the loss of government revenues through illicit manufacturing and smuggling of products is a global phenomenon, running into billions of dollars.
The estimated government's revenue loss from illicit cigarette trade has now increased to more than Rs 50 billion per annum from Rs 27 billion in 2012.
The FBR has been considering adoption of a TB5, focusing first on tobacco industry having the highest revenue potential, and then moving on to other products, such as beverages, cement, sugar and fertilizers, etc. Subsequently, the following enabling provisions were enacted as appearing in Federal Excise Act (chapter VI): Mandatory affixing of Excise Stamp/Banderole on cigarette packs, and cigarette manufacturers to bear cost of the FBR approved TBS, FBR added.
The FBR said that a committee was formed in January 2017 including two members from Tax Reform Commission (TRC) to review the two options of either implementing tax stamps alone or implementing the full Track & Trace system. After considering the committee's report, TRIC decided in March 2017 for Track & Trace System for tobacco products. The RFP titled Tax Stamps Monitoring and Tracking system was accordingly issued by FBR in May 2017.
A pre-bid conference with prospective bidders was held in June 2017. In view of certain concerns expressed by some stakeholders, FBR called stakeholders meetings for consultations on October 12 and November 3, 2017. In December 2017, one of the bidders moved an application to the Competitive Commission of Pakistan (CCP). The CCP held extensive meetings with the various bidders and FBR. The CCP issued a policy note to FBR in March 2018, recommending certain amendments which were reviewed by Tax Reform Commission (TRC).
The FBR said that the WHO also reviewed the RFP and recommended it as positive initiative. Accordingly, FBR issued an addendum to the above RFP in June 2018 addressing concerns raised by the bidders and incorporating CCP's recommendations. Extension of two months was provided to bidders to submit their bids.
Bid submission date was extended nine times after issue of RFP in May 2017, providing adequate time (fifteen months) to the bidders to submit bids. In response to the RfP (as amended by the Addendum), a single bid was received on the due date of 17 August 2018, the FBR said.
According to the FBR, the bidding process was carried out fairly and transparently and adequate opportunity was provided to all prospective bidders. The FBR has followed the Public Procurement Rules, 2004 both in letter and spirit. According to PPRA Rules, a single bid may be considered if it meets the evaluation criteria expressed in tender notice.
The FBR said that the technical evaluation committee may be formed to evaluate the technical aspects and evaluation criteria as per RfP. Delay in implementation of Track & Trace System in Tobacco Industry is causing a loss of Rs 40-50 billion per year to the exchequer, the FBR added.