For over 17 years, Pakistan’s revenue authority, the Federal Board of Revenue (FBR), has been in the crosshairs of providers of tax stamp and track and trace systems for excise products prone to revenue leakage.
Throughout that time, the FBR has been engaged in a long and tiring battle with unscrupulous elements and opponents of track and trace systems, until its ultimate partial success, in 2021, in implementing tax stamps on sugar bags. This was followed, in July 2022, by the introduction of stamps and track and trace on tobacco and fertilizer.
Now, only time will tell how successful this system will be in terms of revenue enhancement and reduction in illicit trade.
I recently conducted an interview with Mr Tariq Shaikh, Project Director of the track and trace system in Pakistan – who is spearheading this important initiative – in order to gain an insight into the system and its challenges.
Q: Why did it take such a long time for FBR to introduce and implement track and trace in Pakistan?
A: Because those with vested interests used every trick in the book to malign the bidding process in order to delay the introduction of the track and trace system (TTS) in tobacco and other sectors. Given that production volumes nowadays have grown beyond human counting limits, it was necessary to introduce TTS for the automated monitoring of these volumes, so the longer it took to introduce such systems, the more time was left for tax evaders to continue selling untaxed goods undetected.
It took 17 years for FBR to finally win its various cases in court and issue a licence to the successful bidder. Before then, there had been five failed attempts to introduce TTS. The failures were due to factors such as the unavailability of tax laws (TTS rules), lack of expertise within FBR, lack of political will, corruption, and other unethical practices.
Q: What impediments/bottlenecks were encountered during the implementation process?
A: Initially, FBR’s licensed solution provider was not allowed free access into production facilities and faced strong resistance from the local industry. In addition, manufacturers were not ready to sign standardised agreements with the licensee and refused to procure equipment and tax stamps.
Certain other interest groups were also against the implementation process, so they challenged it in court. But the FBR took very bold steps and provided the licensee with strong legal and logistic support to implement TTS, not just in sugar but also tobacco and fertilizer.
Q: How far do you think that the system put in place is foolproof and what checks have been incorporated into the system to counter pilferage and the use of fake stamps?
A: The system is foolproof to the greater extent because of physical and technical features (forensic hardness), which have been incorporated to counter pilferage and fake stamps. In addition, FBR has put in place strong TTS enforcement measures throughout the supply chain, right up to retailer level.
Our mobile app has also been launched, as part of the TTS management information system, allowing FBR enforcement officials to verify the authenticity and validity of the stamps. The app also allows manufacturers to order and monitor their stamps.
Moreover, citizens of Pakistan can help FBR with enforcement by reporting any fake and counterfeit tax stamps.
The system ensures effective connectivity between the FBR’s central control room, regional hubs, production lines, factory premises and designated import stations. It collects real-time information on specified goods produced and sold by manufacturers. For this purpose, highly sophisticated and latest-technology tools and solutions are used to ensure a fair and level playing field for all stakeholders, with improved monitoring of federal tax collections and reliable federal tax revenue forecasting.
Q: What administrative weaknesses have been found in the FBR workforce in the enforcement and implementation of the system?
A: Administrative weaknesses include a lack of proper technical and professional training; shortage of resources to effectively enforce the system across the entire country; indecision and lack of clarity in decision making; frequent changes in top management and their impact on field force postings.
Q: Besides sugar, which other products have been brought into TTS?
A: Fertilizer and tobacco.
Q: How much increase in revenue and decrease in smuggling and illicit trade of these goods is expected to be achieved during the first quarter (July-September 2022) and the entire fiscal year 2022-23?
A: PKR 7 billion ($31 million) in the first quarter and PKR 42 billion ($183 million) in fiscal year 2022-23.
Q: What are the hiccups/bottlenecks expected to be encountered in implementing TTS on products brought under TTS from 1 July, and what plans have been formulated by the FBR to counter these issues?
A: We will likely encounter legal challenges, which we plan to pursue vigorously by hiring highly qualified and well reputed private legal firms.
Then we have industry resistance, but we will not bow to the pressure of industry. In fact, we have issued a notification stating that the 30 June TTS implementation deadline will not be extended.
With regard to operational issues, we have learnt the lessons from challenges faced in the sugar industry, which will allow us to improve the system further. We will also keep a close working relationship with the tobacco and fertilizer industries to remove any teething problems.
Finally, to address issues of weak enforcement, our donor agencies and finance division are ready to allocate funds to developing and strengthening enforcement activities through our Inland Revenue Enforcement Network (IREN).
Q: Besides tobacco, sugar, cement, and fertilizer, which other products are expected to move under the TTS in the near future?
A: Beverages, petroleum products, pharmaceuticals, and steel products.
Q: Do you think that the TTS introduced in Pakistan is compatible to the international standard?
A: Yes, the solution offered by the FBR licensee is compatible to the international standard because the license was issued to a highly experienced consortium led by Authentix, a multinational firm, which already operates in US, UK and other countries and installed TTS there. The TTS introduced in Pakistan by the consortium is highly compatible to international standards.
Q: Is FBR planning to globally link this system to other countries in order to track smuggled and non-duty paid goods?
A: FBR is working on it and is in close contact with the FCTC Secretariat.
Q: What will be the overall cost benefit analysis of the implementation of this system in Pakistan?
A: There is zero cost of this system to FBR as the tax stamp fees are paid by manufacturers and importers. However, FBR will collect approximately PKR 42 billion in the 2022-23 financial year.
Q: What are the legal challenges being faced by the TTS in Pakistan? Will they derail the process?
A: FBR faced certain legal challenges because unsuccessful bidders filed petitions and obtained a stay order against issuance of a licence to the successful bidder. However, FBR pursued the cases vigorously and succeeded in getting the courts to dismiss the petitions and vacate the stay order. As a result, this process is back on track and not derailed.
Q: What is the cost of TTS to FBR and to the taxpayers? How does it compare with international experience?
A: There is no cost to FBR as the tax stamp fee is paid by manufacturers and the burden will be passed on to the end consumer. The cost is very low compared to that in other countries.
Q: As stated, there are reports that some sugar mills have circumvented the TTS process, either by recycling stamped empty bags, or by forging the stamps. Have these reports been investigated, and if so, what are the findings? What steps are being taken to prevent such circumvention?
A: Only 192 sugar bags (which is less than 0.001%) were found in the market without tax stamps. These were confiscated by IREN and legal action was taken against the evaders. However, no counterfeit stamps or reused bags were detected during this exercise.
Q: What checks have been placed on field inspectors to prevent collusion with regard to verification of stamped bags?
A: Field inspectors are being closely monitored by a vigilance team headed by senior officers, who conduct surprise visits and raids in the markets.
The Project Director, on the conclusion of the interview, highlighted the importance of TTS in Pakistan and stated that its rollout is a historic event in the development of Pakistan’s economy that will lead to greater economic prosperity.
TTS is an integrated, technology-based system that forms part of FBR’s overall strategy to bring about increased digitisation and automation of the entire tax apparatus of the country in order to reduce opportunities for grafting, coercion and theft.
TTS uses tax stamps, real-time monitoring of production lines, and supply chain track and trace, to ensure accurate reporting of production volumes, reduce smuggling, prevent product hoarding and profiteering, and enhance tax revenue collections.
By uniquely marking each product and tracking it through the marketplace, the system ensures that no one can hoard products in a bid to control their supply and, consequently, artificially raise their price. Furthermore, by automatically counting production data and linking it to a manufacturer’s tax returns, TTS ensures a seamless tax collection system that reduces the need for human interaction.
Despite the system’s numerous benefits, the FBR experienced strong resistance to its implementation, given that the system exposed inefficiencies and eradicated the ability to generate obscene and untaxed profits as a result of opaque structures and lack of visibility over the supply chain.
FBR therefore faced a monumental challenge in its efforts to bring about this paradigm shift, including a barrage of lawsuits and threats by vested interest groups. However, it persevered and was able to rebut each of the legal challenges thrown at it, thanks to the guidelines provided by a robust tendering and regulatory framework.
Now, for the first time, rather than having to rely on inaccurate, incomplete, and questionable data on production statistics, or be at the mercy of an industry looking to maximise its gains through illegitimate means, FBR has in place an independent, technology-based system for obtaining live data on production volumes, and for generating a manifold increase in tax collections.
The interview concluded with a vote of thanks from both sides.