Curtailment: Flow of smuggled tea going unchecked

In fiscal year 2012-13, the FBR collected Rs7.9 billion in taxes, which were just 0.4% of the total revenue collection of Rs1.936 trillion that year. PHOTO: FILE

ISLAMABAD: 

Measures aimed at stemming the flow of smuggled tea seem not to be on top of the Federal Board of Revenue’s (FBR) agenda, as the market size and revenues generated from it do not provide a big incentive to taxmen to go after the smugglers.

The revenues collected through 17% general sales tax and 10% customs duty on tea, were not even half a percentage point of total taxes collected by the FBR in the last fiscal year 2012-13. The size of the smuggled market is in the range of 40-50% of the total tea consumption, according to unverified claims.

The value of tea imports ranges between Rs35 billion and Rs40 billion, a small market, though Pakistan is counted among top five tea consumers in the world. Tax collection amounts to roughly one-fourth of total tea imports.

The size of the smuggled market was anybody’s guess as there were no authentic figures, said Muhammad Riaz, Director General of Intelligence and Investigation, Customs. But he said they were regularly conducting raids and capturing big consignments of smuggled tea.

Millions of kilogrammes of tea find their way into Pakistan every year from Afghanistan under the Afghanistan-Pakistan Transit Trade facility. This high-quality black tea first goes into Afghan markets and is then smuggled back to Pakistan.

According to Pakistan Tea Association, 240,000 tons of tea was consumed last year, more than half of which was smuggled into the country under the garb of transit trade.

Even if the FBR succeeds in taxing the entire consumption, the contribution of taxes from tea will not be one percentage point of total revenue collection.

Imports, taxes

In fiscal year 2012-13, the FBR collected Rs7.9 billion in taxes, which were just 0.4% of the total revenue collection of Rs1.936 trillion that year. The numbers were not impressive. Of the taxes, Rs3.73 billion was customs duty and Rs4.2 billion sales tax. The share of customs duty on tea was 1.5% of total duties while the share of sales tax was hardly one percentage point of total collection.

In the year, tax collection on tea was 14% less than the previous year, mainly because of the previous government’s decision to cut sales tax to 5% from 16%. Pakistan Tea Association had attributed the increasing smuggling to the higher rate of taxes.

“The cut in sales tax neither translated into a reduction in consumer price nor helped increase tax revenues,” said Nisar Muhammad, Member Customs.

Due to the dismal outcome, the government again increased sales tax to 16% in March last year, which was further increased to 17% after the PML-N government announced the budget in June that year.

In 2011-12, tea imports stood at Rs36.7 billion, generating taxes of Rs9.2 billion. The amount was only half a percentage point of total tax collection. The FBR raised Rs5.65 billion in sales tax, which was 1.3% of total sales tax collection. Customs duty was Rs3.73 billion or 1.1% of total duties.

In 2010-11, the value of tea imports was Rs36.2 billion and the revenues generated were Rs9.4 billion. Sales tax collection was Rs5.9 billion or 1.9% of total collection while customs duty collection remained at Rs3.5 billion or 1.4% of total duties.

In 2009-10, the value of tea imports was Rs27.8 billion and tax collection totalled Rs7.3 billion. Sales tax stood at Rs4.53 billion or 1.5% of total sales tax and customs duty collection was Rs2.8 billion or 1.8% of the total.

In 2008-09, tea imports were assessed at Rs20.8 billion and revenues were Rs5.8 billion. Sales tax collection stood at Rs3.6 billion while revenue on account of customs duty amounted to Rs2.2 billion.

In the current fiscal year, the trend is also not encouraging. The FBR has reported about 25% increase in sales tax collection in the first half of the year despite a three-time increase in the tax rate to 17%.

The number shows indifference of the FBR and its inability to collect taxes even from registered importers. Its enforcement teeth seem to be not working.

Tea imports during July-November (2013-14) were recorded at $108.476 million against imports of $147.726 million in July-November (2012-13), according to Pakistan Bureau of Statistics. In the period, 46,799 tons of tea was imported against imports of 49,242 tons in the corresponding period last year.

In search of higher profits, traders switching to loose tea sale

Price difference, quality and location determinants of choice . PHOTO: REUTERS

LAHORE: 

The country seems to be gripped in the smuggling madness, non-payment of duties and taxes. Lahore is no different.

The loose tea market in the provincial capital is also plagued by the issue of non-duty paid smuggled tea, which is sold without fear.

While the price difference between smuggled and legally-imported tea ranges between Rs30 to Rs50, the real variance lies in the quality. According to different market players, loose tea is being smuggled from the Kashmir and Afghanistan borders. Smugglers often mix loose tea with different crusts to make better profits with the government failing to take notice, said tea dealers.

“People in Lahore prefer packaged tea but I think it’s around 50-50,” said Ayaz Malik, a wholesale dealer of loose tea in Akbari Mandi, the biggest wholesale market of Lahore. “But the percentage easily goes up to 80% in favour of loose tea if we include the rural areas around Lahore.”

According to wholesalers, the desire to live a quality life is replacing the usage of traditional loose commodities. The increased usage of teabags and powder milk at the workplace and households is also a reason behind the tilt towards packaged tea.

Loose tea in the wholesale market ranges between Rs200 up to Rs450 per kilogramme (kg). To make the tea affordable for the general public, importers blend the commodity with three qualities, as it would be almost next to impossible for them to import and sell the ‘A’ brand that costs more than Rs1,000 per kg.

“Our margin in each kilogram is between Rs4- 5. The increased phenomenon of smuggled tea is creating problems for legal importers,” Malik said.

Loose tea is used in different tea shops, sold openly in different villages and in urban areas. Despite the phenomenon of smuggled tea, Malik said, there are some traders who mix different qualities to make a higher profit. For such traders, the rural community and roadside tea kiosks are the best market, he said.

Traders said that wholesalers, who were running their businesses legally, have switched towards selling the smuggled loose tea as it means a higher profit margin for them. “Things are getting critical for our market — we have tried to overcome this issue many times with the help of the local community but we are yet to meet success.

“Until the time the government comes up with a uniform mechanism and import policy, we fear the trade of smuggled loose tea will keep on gaining strength.

Kenyan auction: Huge source of country’s import

File photo of a tea plantation in Kenya PHOTO: REUTERS/FILE

KARACHI: 

If it were not for the Kenyan auctions held on a weekly basis in Mombasa, tea would cost more and taste worse in Pakistan.

The price and quality of Kenyan tea of the type Pakistani’s demand is so better than those from neighbouring China or Sri Lanka that a bulk of Pakistan’s imports comes invariably from the African continent every year.

According to the World Trade Organization (WTO), out of tea worth $361.3 million that Pakistan imported in 2012, 61.2% – or $221.1 million – came from Kenya alone.

In contrast, the share of tea imported from China, Vietnam, Sri Lanka and India – the other major tea exporting nations – remained 1.1%, 4.2%, 4.3 and 9.9%, respectively, in the same year.

So what makes Kenyan tea more popular than, say, Indian or Chinese tea in Pakistan?

“You can’t be sure about the quality of the tea imported from Vietnam and China. Their tea is generally not of a standard, uniform quality — it’s a blend rather than garden packed,” said Ghazanfar Iqbal, who works as an indenter for tea importers.

Secondly, the auction process for Kenyan tea is far more coordinated, transparent and efficient than that in other tea-exporting countries, like China or Vietnam, according to Iqbal, whose business is based in one of Karachi’s oldest trading centres, Jodia Bazaar.

Kenyan auctions

Pakistani companies take part in Kenyan tea auctions through their representatives/suppliers in Mombasa. While major importers of tea with established brands in Pakistan often operate through their dedicated representatives, others prefer to import through indenters — middlemen who facilitate tea imports by coordinating between the local party and Mombasa-based representatives.

The number of indenters in Pakistan is fairly small. About a dozen such professionals operate in the country mainly out of Karachi’s decades-old trading centres.

No wonder the share of Kenyan tea grew on average 13% per annum between 2008 and 2012, according to the WTO. On the contrary, the share of Chinese tea in Pakistan’s total imports shrank 16% every year during the same five years.

Types of tea that are most popular in Pakistan include BP1, which is known as danedar in local parlance, PF1, which is a mixture, PF2, PD and D1, which is known as choora chai in the local tea market.

Tea is imported in lot sizes of 20, 40 and 60 packages. The amount of tea contained in each package varies according to the type of tea. For example, each package of Kenyan origin BP1 type contains 62 kilograms of tea, PF1 (68 kg), PD (75 kg) and D1 (79 kg).

“Until 10 years back, Kenyan brokers would send their printed catalogues to clients in different parts of the world for teas to be offered in upcoming auctions. But now the dissemination of such kind of information takes place online,” Iqbal said.

So shouldn’t things be hunky-dory for tea importers in Pakistan? After all, the retail price of a 250 gm packet of super quality tea increased on average 21% annually between 2007-08 and 2012-13, according to a report compiled by a consultancy firm KPMG Taseer Hadi and Company.

However, tea importers that claim to play by the rules say their margins are shrinking because of two reasons — smuggled tea from Afghanistan and the misuse of commercial importers’ licences.

Speaking to The Express Tribune, a tea importer and retailer said the vast difference in duty structures imposed by Pakistan and Afghanistan, coupled with a porous international border, has dwarfed the business of honest tea dealers.

He seems to have a point. The equivalent ad valorem tariff – which is assessed as a percentage of the value of an import — applied by Pakistan to Kenyan tea was 10% in 2012, according to the WTO. In contrast, the tariff was only 2.8% in the case of Afghanistan in the same year. Keeping in view the porous border we share with Afghanistan, it is least surprising that tea smuggled from Afghanistan is so cheaply available in Pakistan like so many other commodities.

Furthermore, in order to encourage the sale of packaged tea in the country, the government has given a number of tax relations to commercial importers’ licence holders.

But allowing the misuse of their licence, these companies often let smaller players import tea on their documents. “After paying a small ‘commission’ to the commercial licence holder for using his name, a small player can save at least Rs5 per kg. I believe 90% of tea imports in Pakistan are carried out through the questionable use of these commercial licences,” he added.

Real estate market hits growth trail again

Various cities in Punjab subject of investors’ interest. CREATIVE COMMONS

LAHORE: 

After passing through a correction phase of nearly five months, the real estate market in Lahore is once again on the path of growth. However, there are a number of reasons why the extent of the growth may not meet investors’ expectations.

For the past few years, developers, after failing to find a suitable place in Lahore, have tended to focus on neglected but other populous cities of Punjab including Multan, Faisalabad, Gujranwala and Sialkot.

Hashu Group is one of them, Bahria town, city housing schemes (once a part of Bahria town) are the others. The latest name is the Defence Housing Authority (DHA). Since DHA is the most trusted name for any investor – in Pakistan and overseas – people find a reasonable alternate to invest.

Gujranwala, Multan and Bahawalpur are three cities where DHA has planned to establish housing societies, among which the sale and purchase for DHA Gujranwala has already kicked off. Such developments are observed as a positive for the long-term growth of the real estate sector.

“This spread out is good for the market in general,” said Mian Talat, chief executive officer at Talat Enterprisers, a real estate firm. “People now have more choices to invest and live according to their convenience.

The correction in the Karachi Stock Exchange is also a factor behind the recovery of the real estate market recovery.

Common investors of both markets believe that the KSE may crash any time. Given the situation, investors tend to switch to the real estate market. When stock index starts declining, many investors switch over to the real estate market and this is what is happening exactly now”, Talat added.

Few years back, Lahore, Karachi and Islamabad/Rawalpindi were the only places where investors found some room to put their money in for some profits. However, these cities are now pushing their limits — Lahore’s boundaries are now merging with some of its districts due to various factors.

Property prices in Lahore, despite almost a 20% correction in these five months, are quite abnormal. It is hard to find a piece of one kanal of land in a decent housing scheme below Rs10 million. If the same amount of land is located in a prime location inside a housing schemes then the price exceeds Rs20 million.

“Since Lahore is one of the major beneficiaries of the real estate boom, it is unlikely that real estate activities are stalled in the future. This is due to developments of housing schemes in other cities”, said Waseem Tariq, Chief Executive Officer of F-1 Properties. “The price fluctuation mechanism for real estate, as per our expectations, will be solid now.”

Automotive industry: Honda opens second plant in Mexico

The $800-million plant in Celaya, in the central state of Guanajuato, will churn out 200,000 units per year. PHOTO: AFP

CELAYA: 

Honda unveiled a second factory in Mexico on Friday, seeking to capitalise on the nation’s rising power in the sector and strengthen the Japanese car giant’s foothold in North America.

The $800-million plant in Celaya, in the central state of Guanajuato, will churn out 200,000 units per year, contributing to Mexico’s race to beat Canada and Japan as the top car exporter to the US.

For the company, producing the Honda Fit hatchback and a yet-to-be-named compact-sport utility vehicle in Mexico will allow the company to expand its presence in the Mexican and US markets.

Latin America’s second-biggest economy has become an increasingly favoured destination for car makers thanks to its lower wages, skilled workforce and participation in a raft of free-trade pacts.

“We have great expectations for growth in the US market as well as the Mexican market,” Honda Chief Executive Takanobu Ito told reporters, adding that Mexico has good growth potential for small cars.

“In addition to having the North American Free Trade Agreement (Nafta), Mexico has free-trade deals with several regions in the world, including Japan and Europe,” he said through an interpreter.

Mexican President Enrique Pena Nieto was on hand to unveil the sprawling factory, which will have 3,200 workers, alongside state officials and Honda executives, including Ito.

Mexico is now the world’s eighth-biggest car maker and the number four exporter after Germany, South Korea and Japan, according to industry figures

Hybrid seeds can help recover lost productivity: Experts

Pakistan is already far behind in productivity compared to regional countries including India, Sri Lanka and Bangladesh. PHOTO: FILE

FAISALABAD: 

Farmers of the country can recover lost productivity, estimated at 50% of total production, with the help of large-scale planting of hybrid seeds and modern farming practices and equipment, suggest leading agriculture experts.

Traditional methods of farming cannot change depressed financial conditions of the farmers. Only adoption of modern techniques can make farming a profitable business which could change living standards of farmers, which at present are not significantly different from the colonial era, they say.

Growers are getting approximately 50% less yield per acre when compared with regional countries and productivity is more than 100% lower compared to developed countries. Lower yield leaves the producers uncompetitive in the market, experts point out while talking to The Express Tribune.

The only way to tackle food deficiency is to increase crop production, but high cost of pesticides and black marketing of fertiliser are hampering such efforts.

Pakistan has an agriculture-based economy that contributes 21% to gross domestic product. Eighty per cent of landholders are small farmers having less than five acres of land. They cannot afford modern farming techniques and high cost of inputs.

“Hybrid seeds can increase productivity, rice is a best example. Paddy growers, who use hybrid seeds, are enjoying 60% higher yield compared to traditional and old varieties,” said Akram Elahi, an agriculturalist. The higher yield had made hybrid seeds popular among rice farmers as the genetically modified technology could double productivity of some crops, he said.

However, application of lower than required inputs because of rising prices reduced the production of crops, he added.

“Farmers have scaled back application of inputs, they even sow low-quality seeds and eventually yield drops. Government should encourage them to step up application of inputs in order to improve the output and enhance productivity,” suggested Ajmal Ali, an agricultural expert.

According to him, developed countries entirely rely on hybrid seeds for major crops like maize, canola, sunflower and vegetables, however, Pakistan is planting only 30% of crops with such varieties.

Leading industries including textile, sugar, rice and flour heavily depend on the agriculture sector and a growth in agriculture will save the economy.

Pakistan is already far behind in productivity compared to regional countries including India, Sri Lanka and Bangladesh. Its yield is around 50% lower in various crops.

Farmers argue that hybrid seeds and modern techniques are quite expensive that they cannot afford. They believe that only government’s support can turn the situation and in the absence of state incentives and intervention small farmers cannot raise their living standards.

If the government offers incentives like the way regional states are giving to their farmers, the financial condition of growers in Pakistan could turn better, they say, citing the incentives given to Indian farmers, who enjoy cheap and smooth supply of electricity, pesticides and fertilisers at controlled prices.

Illicit trade: Tea smuggling shaves Rs8.7b off potential tax revenues

Manufacturer terms anti-smuggling measures short-lived with little impact . PHOTO: FILE

KARACHI: 

One in every three cups of tea consumed in the country is tax-evaded and a product of illicit trade, which doesn’t only benefit smugglers with higher profit margins against legitimate brands but also costs the national exchequer more than Rs8.7 billion or $84 million a year in tax revenues.

Being one of the world’s largest importers and consumers of tea, Pakistan is a big market for tea traders. The country’s estimated total consumption stands at approximately $610 million as of calendar year 2013, according to Pakistan Tea Association (PTA).

In what can be described as a major strain on the cash-strapped economy and the profits of legal brands, illicit tea business accounts for more than a third, half by some estimates, of the total market.

According to data compiled by Pakistan Bureau of Statistics, the country imported 122,000 tons or Rs35.6 billion worth of tea in fiscal year (FY) 2012-13 – the number did not include 112,000 tons of tea smuggled and consumed in the country.

“Through repeated market research, we know that per capita consumption of tea in Pakistan is 1.17 kgs per year,” Unilever Pakistan Limited, one of the major players in the market and a member of PTA, said in response to queries.

“Based on an approximate population of 200 million, this amounts to 234,000 tons [234 million kg]. Thus, almost half the tea is smuggled in mainly through misuse of the Afghan Transit Treaty,” the company said quoting PTA. Based on their findings, the illicit tea business comes to about 48% of the total market. Explaining the challenges facing the legitimate industry, the maker of Lipton Yellow Label Tea said anti-smuggling measures taken so far have been short-lived and have a negligible impact.

“Business operations and profitability of legitimate commercial importers and packers have been severely curtailed,” it said, adding, “smugglers enjoy an unfair advantage of approximately Rs70 per kg.”

Due to high taxes, the lower-income groups are sold tea adulterated with harmful dyes, pigeon’s blood, sawdust to name a few, it said.

While the smugglers are benefiting at the cost of legitimate industry, the damage to the national exchequer in terms of revenue loss is equally significant.

The import duty levied on tea has remained unchanged at 10% for the past several years while general sales tax (GST) was raised from 16% to 17% in the last budget. If the tax rate is applied to 112,000 tons of smuggled tea, it translates to a potential revenue loss of Rs8.7 billion for FY2013.

Moreover, an estimated 100,000 tons were imported through non-duty-paid channels in 2013, resulting in a total revenue loss of Rs11 billion, Unilever said quoting PTA.

The government’s version on the subject has been covered in a separate report of the same edition. The industry, however, suggested what can be done to curb this menace.

Quantitative limits, lower tax

The Pakistani arm of the Anglo-Dutch foods and consumer goods giant said the government should improve procedures for Afghan transit trade and place quantitative limits on the volume of tea that is allowed access through Pakistan.

Afghanistan is a nation of only 25 million – predominantly green tea drinkers – but they are importing nearly the same quantity of black tea as Pakistan, a nation of nearly 200 million, it said.

The government’s support via policy decisions or reduced taxation can create a more level playing field by reducing the cost of branded tea for consumers, Unilever said. “In June 2012, sales tax on black tea was reduced from 16% to 5% to create a more level playing field. However, the decision was reversed in nine months due to revenue pressure,” it said.

However, the window in that case was too small for any significant impact on the infrastructure and modus operandi of the informal sector, the consumer goods giant said.

“Policy decisions must be given due time to demonstrate impact on tea smuggling, which has been a practice for decades. Smuggling can be eliminated gradually and with patience through mutual cooperation between the government and tea manufacturers,” it said.