In an era where the federal government and finance minister are advocating for the documentation of the economy and digitization of value chains to broaden the tax base and elevate the tax-to-GDP ratio, smuggling and tax evasion remain pervasive.
Consequently, we witness a shrinking formal sector footprint, an expansion of the black market, and an influx of inferior products, particularly in the food industry. These externalities pose a significant challenge to the government’s revenue generation efforts.
Several sectors are visibly impacted, including the formal juice sector, dairy and other food products, tobacco, petroleum products, and their derivatives.
For instance, the smuggling of Iranian diesel has been extensively covered and is significantly impacting the local refinery industry, hindering their plans for modernization and upgradation. The government reportedly loses approximately Rs17 billion per month due to this illicit activity, fostering a thriving illegal value chain.
Similarly, the tobacco industry faces challenges despite a 200 percent increase in taxation last year, as sales volumes for major tobacco companies have plummeted by over 50 percent. This decline has led to an increase in the market share of smuggled, counterfeit, and duty-not-paid tobacco products, further fueling an illegal value chain.
Moreover, the formal juice industry has been adversely affected by the imposition of a 20 percent federal excise duty (FED) last year. This has resulted in a 40 percent decline in industry volumes and a shrinking market size, with illicit players seizing market share. The cumulative impact of GST (18 percent) and FED (20 percent) stands at 42 percent, incentivizing low-quality products from the informal sector. Consequently, consumers are shifting towards cheaper, albeit unhealthy, products.
There are clear indications of declining formal juice consumption following the imposition of taxation. Removal of a 5 percent FED on packaged juices resulted in sales recovery and substantial volume growth over three years. However, after the imposition of a 20 percent FED, volumes have plummeted, disrupting the fruit value chain and hindering industry growth and export potential.
Furthermore, lax enforcement of regulations, such as SRO 237, contributes to the proliferation of illicit products. Imported food, including dairy products from Iran, floods the market without adhering to shelf life requirements, ingredient labeling, or Halal certification standards, compromising consumer safety and health standards.
In conclusion, while the government aims to boost revenues through taxation on the formal industry, the lack of enforcement measures has led to the growth of informality. This not only results in potential revenue losses for the government but also stunts the development of formal value chains. It is imperative for the finance minister to reassess the strategy by reducing taxes and implementing stringent enforcement measures.
