Smugglers' Cup Of Tea

By Amir Zia
The News
August 1, 2011

Nearly half of the 200,000 tons of tea annually consumed in Pakistan comes through smuggling, which hurts lawful businesses and deprives the national exchequer of billions of rupees in taxes.

It is now no longer news that Pakistan remains a paradise for tea smugglers. As our government has accepted, compromised and learnt to live with countless other vices, different shades of incompetence and corruption and even mafias and terrorist groups, it also seems at peace with not so innocent tea smugglers. No wonder nearly half of the 200,000 tons of tea annually consumed in Pakistan comes through smuggling, which is hurting lawful businesses and depriving the national exchequer of billions of rupees in taxes. “There is a huge market for smuggled tea, which gives about a 25 to 28 percent profit margin to smugglers,” said a top executive of a multinational company, which sells popular brands of tea. “The officially imported tea is costlier because of the customs duty, levied on the value of the commodity, and a 16 percent sales tax,” he said requesting not to be named in line with his company policy. The smuggled tea, the bulk of which comes through Afghanistan due to the misuse of the transit trade facility given to this landlocked country by Islamabad, is available across the country, including in all the major cities and generates hefty profits for its dealers, who do not have to pay any government levies or taxes.
Local tea industry officials say that Afghanistan with a population of barely 29 million, imports more than 100,000 tons of black tea, though its “national popular drink” remains green tea.
In comparison, Pakistan -- a country of around 180 million people -- where black tea remains an addiction, imported 127,000 tons of tea in fiscal 2010/11 (July-June) compared with 95,000 tons in 2009/10, according to tea industry officials.
Hamid Saeed Khwaja, cochairman of the Pakistan Tea Association, said that more than 30 percent rise in the official tea imports last year was due to the fact that now only the government-owned National Logistics Cell and Pakistan Railways carry the transit trade goods for Afghanistan. “This has raised the cost of operations for tea smugglers, creating some more space for the officially imported tea,” he said.
The government’s move to assign the state-run logistics services for Afghan transit trade came following the Supreme Court's suo moto notice of the abuse of this facility. Background interviews showed that smugglers deal only in high quality tea, costing $2.5 or above per kg, which bring them good margins. They do not go for tea costing $1.5 or less per kg, which is mostly imported under the official trade.
Tea industry officials said that although the Federal Board of Revenue (FBR) and law enforcement agencies have been trying to curb tea smuggling, the task remains easier said than done due to the 2,250-kilometre long porous Pakistan-Afghan border. But most of the smuggling is done through the official trade points and their nearby unofficial mountainous routes.
The multinational company official said that attempts to check smuggling in the past are unlikely to succeed now because smugglers pay huge bribes to officials deputed along the frontier. “Apart from transit trade, smugglers also use the Iranian port at Bandar Abbas to move smuggled goods, including tea,” he said. Zafar Mahmood, Secretary Commerce, said that Afghanistan-Pakistan Transit Trade Agreement, 2010 addresses Pakistani concerns, but its enforcement remains the responsibility of the FBR and law enforcement agencies.
The FBR, known more for missing its targets than achieving them, finds itself struggling along with the other law enforcement agencies when it comes to handling affairs at the Durand line which maintains a special status since the days of the British Raj. The war on terrorism, the huge financial stakes of Pakhtun tribes living on both sides of the frontier as well as political and administrative sensitivities now make their task even more difficult. However, the tea industry officials say that they have a cheaper and better option to beat smugglers. Khwaja said that the government collects around 38.5 percent duties and taxes on officially imported tea that amounted to Rs9.0 billion in the last financial year. “We say that slash taxes and duties by 50 percent, including the sales tax. This will erase the profit margins for smugglers and discourage smuggling.
The government will not see its revenue drop because the official size of tea imports will double in line with Pakistan’s tea consumption pattern,” he said. “It will also help reduce tea prices for consumers by at least 50 rupees a kilogram, which will be a win-win situation for everyone.” The executive of the multinational, however, argued that the best way to revise levies on tea remains to raise import duty and exempt it from sales tax, which would reduce total levies to a point that leaves little or no incentive for tax evasion and smuggling. “It is estimated that smugglers incur Rs30,000 per ton by way of facilitation costs. Government levies of around Rs40,000 per ton should substantially remove the incentive to evade. The Customs Members of FBR would of course welcome higher import duty.” He, however, said that the Sales Tax member would reject the proposal of reduction in sales tax, citing reasons including the need for the documentation of the economy despite the fact that a high general sales tax rate encourages smuggling of tea. “Someone needs to bring them out of their silos, to see that aggregate government revenue remains neutral,” he added. Industry officials say that the FBR remains reluctant to act because it underestimates the tea consumption figures. Tea companies claim higher consumption and smuggled tonnages, basing it on their knowledge of consumer trends and bid volumes for Pakistan and Afghanistan in tea auctions in Kenya, they said. “According to the FBR, the quantity of smuggled tea stands at around 40,000 tons, while tea companies estimate it at around 110,000 tons. Even if 40,000 tons is the correct figure, urgent corrective action is called for,” the executive said. Industry officials say that there remains a general apathy towards the formal sector for which lip service is paid, but little is done to remove impediments. “In some extreme cases, the big companies and multinationals are seen as suspicious and profit-greedy and by implication there is sympathy for the ‘poor, small’ smuggler and the corner shop that deals in smuggled items,” said the multinational executive. “After all, there are markets like Shah Alam and Akbari Mandi in Lahore, Raja Bazar in Rawalpindi and Jodia Bazar in Karachi which openly deal in smuggled and counterfeit products, yet are tolerated. Some attribute smuggling to cultural and social reasons, suggesting and by implication accepting that we are a nation of cheaters.” It should be not just for the tea industry, but the government needs to encourage organised businesses by establishing the rule of law and providing a business-friendly environment. This will help attract the badly needed investment, which will boost growth and create employment. "The best way to promote new investment is to promote success of existing businesses. New investors are unlikely to enter sectors that are plagued by smuggling and foreign investors are put off when they hear of whole sectors in which smuggling and evasion go unchecked for long periods,” the executive said adding that existing operators, exasperated by apathy and declining business would be most likely to quit. “The informal sector will grow. So will the havala business, as that is how payment for smuggled tea is made.”