Widespread tobacco use is one of the leading causes of serious illness and death in Pakistan, and rampant illicit tobacco sales have sapped the country’s Federal Board of Revenue (FBR) of much-needed revenue. The long-awaited implementation of a tobacco track and trace (T&T) system could have been a sure-fire way to boost sales taxes and crack down on the underground tobacco trade, but the manner in which the FBR managed the tender process has been so controversial that it is facing court challenges this week.
Under pressure from the IMF to finally implement a track and trace solution after months of delay, have Pakistani tax authorities ended up awarding the contract to a tobacco industry spinoff which fails to comply with Pakistan’s obligations under the World Health Organization’s Framework Convention on Tobacco Control (FCTC)? And what broader implications does the flawed track and trace tender have for the FBR?
Is Inexto a Trojan horse for Big Tobacco?
Where did Pakistan’s tender process for track and trace go so wrong? The FBR first distributed the Invitation for License (IFL) in August this year, but soon after, it hastily changed its scoring criteria to emphasis the price of the system over its proven effectiveness or compatibility with FCTC regulations. Such an abrupt change naturally raised suspicions that tobacco industries had a hand in the decision making process, as the new criteria eliminated many established competitors out of the race and led the FBR to award its license to the National Radio & Telecommunication Corporation (NRTC). With no track record in the tobacco industry, NRTC is relying on a highly problematic subcontractor, Inexto.
The FBR’s decision to award the contract to the NRTC and Inexto has raised alarm bells among public health professionals, given Inexto’s history of ties to the tobacco industry and its use of the Codentify system initially created by tobacco giant Philip Morris International (PMI). PMI and a network of front groups have promoted the Codentify system to governments as a purported solution to illegal cigarette sales. However, since FCTC regulations explicitly prohibit countries from using T&T systems created and controlled by the tobacco industry, Codentify was sold to the newly formed Inexto in 2016 for a symbolic price of 1 Swiss franc. This move was intended to give Codentify a veneer of independence— even though its executives are former PMI officials.
Public health experts from the WHO have specifically pointed out that Inexto and the Codentify system do not comply with the FCTC’s standards, which clearly state track and trace systems must be independent from the tobacco industry they are policing—for obvious reasons, given the industry’s history of duplicity and heavy-handed lobbying. What’s more, awarding the contract to NRTC could give Big Tobacco and its lobbying groups a backdoor into Pakistani public health policymaking. Moreover, the problematic tender risks negating all of Pakistan’s efforts to raise the FBR’s revenues, given the tobacco majors’ long history of tax evasion.
Can Imran Khan reform the FBR?
Unfortunately, this messy tender process speaks to broader problems with the FBR. Prime Minister Imran Khan has identified tax reform as a priority for his government, but Pakistan continues to suffer from perpetual revenue shortfalls. This deficit only deepens Islamabad’s reliance on international lenders like the IMF and the World Bank – who have had to foot the bill for Khan’s tax reform efforts. Just this past June, Pakistan signed another $918 million loan with the World Bank, to support its economy and the reforms necessary to put its tax system back on the right track.
Within his first 100 days in office, Imran Khan approved a plan to split revenue policy off from the rest of the administration. However, following backlash from a number of politicians this decision was soon overturned. Imran Khan again tried to create a distinct Pakistan Revenue Authority (PRA) to replace the FBR, but faced severe blowback from prominent figures in the FBR, who argued that the revenue agency had already had enough reforms under previous loan programs. These previous reforms, however, only provided a facelift to the institution and failed to offer effective change.
Imran Khan’s proposed revamping of the FBR has prompted agitation from those within the institution, leading the government to try and play a balancing act of appeasing disgruntled FBR employees while trying to meet higher revenue targets to satisfy international lenders. The Prime Minister had to personally get involved and offer assurances to top FBR officials that the government wouldn’t reform the tax agency without consulting all stakeholders. “We want to get serious proposals from you as per your experience to make the tax system more efficient,” he told officials. Nonetheless, this balancing act hasn’t worked out so far, as the FBR has reported a revenue shortfall of Rs211 billion (1.36 billion USD) this past year.
Is FBR’s fall inevitable?
Due to the decentralized nature of its revenue agency, the Pakistani government is working with top FBR officials to create a new semi-independent tax authority, to collect its main revenue sources. The FBR chief expects that this new tax authority will seek to compensate for revenue shortfalls by introducing a fully automated “track and trace” system for four major industries, in addition to tobacco.
However, due to the precedent set by the shady and counter-productive nature of the NRTC & Inexto tender process, there are fears that the “track and trace” system for the other industries will be handled in the same negligent way. By handing over its track and trace system to Inexto, the FBR could in one fell swoop set a precedent for entrenching large tax-evading corporations and enriching top officials while leaving the state facing a significant revenue shortfall.
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