Aftab Anwar Baloch
Pakistan launched an ambitious initiative aimed at enhancing tax revenue, reducing counterfeiting, and preventing the smuggling of illicit goods by rolling out a Track and Trace System (TTS) across several key sectors, initially on tobacco, and moving on to cement, sugar, and fertilizers with subsequent plans to extend the system to beverages and later to fuels. Additional products, such as ceramic and porcelain tiles, and steel, were also in focus. The TTS solutions of this type, different versions which are utilized globally in dozens of other countries, aim to streamline the tax collection process, minimize tax avoidance and evasion, and ultimately monitor in near real-time, the production and importation of products in key industries. The TTS is a technology-based solution for tracking and tracing products throughout the industrial supply chains, from manufacturer to final retail distribution. This move marked a significant step toward modernizing Pakistan’s tax collection infrastructure and improving regulatory compliance across these important segments of the industrial base.
Background
Tax evasion is one of the main reasons behind the low tax-to-GDP ratio. The quantum of evasion of the indirect product excise tax is much higher than the more controllable direct taxes on individual and corporate income. In the macroeconomic framework agreed with the International Monetary Fund (IMF) in 2008, Pakistan had set a target of bringing the tax-to-GDP ratio to 14.2% by 2013-14, which has not yet been achieved.
Numerous tax reforms were initiated in various political periods to increase the tax collection capacity, expand the tax net, and prevent tax evasion. The authorities emphasized that the effective implementation of the Track and Trace System has the potential to contribute billions of rupees to the national exchequer that are yearly being lost to illicit trade.
Efforts to implement the system had been going on from the Government of Pakistan for nearly ten years prior to 2020. In 2021, during the tenure of the Pakistan Tehreek-e-Insaf (PTI) government, the Federal Board of Revenue (FBR) led the charge by implementing the TTS, under the conditions stipulated by the International Monetary Fund (IMF). In a tweet, the then PM Khan described the TTS as an effective tool for upholding the rule of law and preventing the sale of counterfeit products and illicit trade. He was confident that tax evasion of billions of rupees would be materially reduced after full implementation of the TTS.
TTS was awarded through public tender and later began implementation by the international consortium consisting of M/s AJCL, MITAS, and Authentix through fair and transparent bidding process headed by the Federal Board of Revenue (FBR). The consortium has proven public and private sector expertise and collaborative customer partnerships ensuring that the programs implemented are comprehensive, technologically advanced and professionally executed. The FBR and the Licensee have actively participated in the rollout of TTS; the pilot project was first introduced in the cigarette industry during the fiscal year 2021-22, serving as a testbed for the system before expanding to other sectors.
The initial phase focused on monitoring the production and distribution of locally manufactured cigarettes, a sector with certain segments being notorious for tax evasion and illegal trade. To accomplish this objective, TTS provides the automated marking of each packet with an individual secure tax stamp which includes a unique serialized, digital code. TTS aimed to ensure that all domestically manufactured products were stamped and registered, thus reducing the potential for counterfeiting and smuggling. After implementation in the tobacco sector, FBR extended TTS to sugar, cement, and fertilizer industries. These sectors were chosen because they contribute significantly to the national economy and are prone to illicit trade, tax evasion and fraud. The TTS demonstrated positive performance during the fiscal year 2021-22 compared to 2020-21 with an 11% increase in tax revenues.
Challenges
Despite the well-intentioned system launched in the country, the process of implementation and installation of the system in manufacturing units across key sectors, such as sugar, cement, fertilizer and tobacco, is at best making slow progress due to lukewarm attitude of tax collection machinery.
Unfortunately, whenever an important step is taken to improve Pakistan’s economy, a certain section and vested interests become active to thwart such measures. This delay is attributed to a lack of interest on the part of the relevant authorities, as well as resistance by certain manufacturers, some of which are undoubtedly have been profiting from tax evasion and illicit activities.
The Ex-Chairman FBR Shabbar Zaidi elaborated on the reasons behind the delay in putting in place the track and trace system to document the economy and prevent tax evasion. He said, “If the reasons for delay in implementing the system were understood, then people would know why the government or government agencies failed to take steps for the betterment of the country.” He further added “many manufacturers, dealers and retailers had become a mafia, which did not want the system to be strong and their theft caught.”
Zaidi played an active role in introducing the concept of implementing a track and trace system in the country to monitor large industries’ production. However, his proposals met stiff resistance and he was eventually forced to retreat, leaving FBR.
Digitization is the most efficient way to document Pakistan’s economy, which required the introduction of technology-based solutions. To remove obstacles to digitization, the Public Procurement Regulatory Authority (PPRA) rules should also be harmonized with the international rules related to IT contracts.
Prime Minister Shehbaz Sharif most recently asked the newly constituted inquiry committee to look into the reasons as to what is the delay. So far in the inquiry proceedings, two esteemed officers, one of them the current chairman of the Federal Board of Revenue, were allegedly found responsible for many of the “delays” in the enforcement of the track and trace system. It is also believed that the reason the TTS has been slower to rollout than originally expected is because of politicization and rift between the governments of Imran Khan and Shehbaz Sharif from 2018 through 2022 and 2022-24 and the sword of Damocles fell on the solution providers and now it is being tried to bring an amicable solution and put the system back on track on the insistence of IMF and World Bank and it has been found that the system based solutions are the only means to lift the country out of an ongoing low collection spiral.
FBR Deficiencies
The operational inefficiencies of FBR also hamper the overall implementation of TTS. The lack of a streamlined process and insufficient training for officials led to the fact that the system was not implemented as efficiently as it could have been done both effectively and uniformly across the board to the targeted sectors.
The FBR Officers, due to their lack of knowledge regarding the real dynamics of tobacco/cigarettes in Pakistan failed to sensitize core stakeholders on the actual impact of cigarettes being manufactured by the AJK-based cigarette companies. The cigarette manufacturers based in Azad Jammu and Kashmir (AJK) were not adequately sensitized to the new system’s impact and due their political clout resisted the implementation of the system in their areas undermining the system’s effectiveness. All proceedings on this issue are presently silent on this major loophole.
Program at Risk
The International Monetary Fund (IMF) mission expressed dissatisfaction with the FBR’s implementation of the TTS, emphasizing the need for a robust and foolproof system. Sources said the IMF has requested a detailed implementation report on the track and trace system and set a deadline for its complete adoption across the board on the five major sectors in the country. The IMF’s critique underscored the importance of the TTS in improving Pakistan’s fiscal health and reducing illicit trade.
The IMF is concerned about the challenges the Licensee and eventually Pakistan is facing in implementing a track and trace system more effectively. If these challenges are not adequately addressed, it could undermine the system’s effectiveness and credibility, leading to skepticism from international financial institutions.
This may also act as a deterrence for future investments by international companies into Pakistan due to lapses and non-compliance by the Government Departments, especially in case of international tenders.
Way Forward
Pakistan’s initiative to bolster tax revenue and combat illicit trade through the Track and Trace System (TTS) is truly commendable. By implementing this cutting-edge solution across key sectors like tobacco, cement, sugar, and more, Pakistan is taking a giant step towards modernizing its tax collection infrastructure and machinery.
This move not only promises to enhance tax revenue but also to curb counterfeiting and smuggling, ensuring a fair playing field for businesses and bolstering regulatory compliance. The TTS, a globally recognized tool, is set to revolutionize Pakistan’s supply chain management from supplier to consumer fostering transparency and accountability at each and every step of the operation.
Temporary fixes will not resolve Pakistan’s revenue issues, a sustained and continuous effort to expand the tax base is crucial. The TTS is a significant step towards digitalization. If the system keeps facing obstacles as it is nowadays, then the dream of digitalization would remain a dream. A sustained effort to expand tax base is crucial for the health of the economy. To this end, there is a dire need for the government to expedite the implementation of the system, facilitate discussions between the FBR and the supplier consortium and bring the parties to an amicable solution for the betterment of the country.
Providing comprehensive training for FBR officials and officers is absolutely necessary to ensure a well-versed government staff in the technical and operational aspects of the TTS. This would help address the inefficiencies observed during the initial rollout. Conducting targeted outreach and engagement programs for core stakeholders is also essential.
In alignment with the IMF’s advice, the FBR is recruiting specialized personnel funded by world bank for the project in order to fully equip FBR with proper expertise in TTS to ensure the system’s effective operation. By employing individuals with the necessary technical know-how and experience/expertise, the FBR aims to overcome the initial hurdles and fully realize the benefits of the Track and Trace System.
The involvement of IMF and the World Bank is fundamental in ensuring that the TTS meets international standards. IMF’s oversight and support can provide the necessary guidance and pressure to help Pakistan achieve its objectives. By leveraging international expertise and best practices, these institutions can assist in refining the TTS and addressing its current issues experienced in the initial rollout.
The future of TTS in Pakistan hinges on the successful resolution of the current issues and the implementation of the already Licensed system, which is robust, efficient, and mostly, fool proof. The government’s proactive steps, combined with international support, can pave the way for a more transparent and accountable production and distribution framework in the targeted sectors. Despite the initial challenges, the continued commitment to improving the system and addressing stakeholder concerns holds promise for achieving the project’s ambitious goals. The government’s focus on effective implementation, coupled with the IMF and World Bank’s support, can ensure that the TTS becomes a cornerstone of Pakistan’s economic reform strategy.
Looking ahead, with a focus on comprehensive training for officials, targeted outreach to stakeholders, meeting reasonable commercial requests by the supplier, and the recruitment of specialized personnel, Pakistan is poised to overcome obstacles and realize the full potential of the TTS. By staying steadfast in its efforts and leveraging international expertise, Pakistan is laying the foundation for a more transparent, accountable, and prosperous future.
