Implementing Tax Stamp and Production Monitoring in Pakistan – A Perfect Storm?

Looking at the interplay of challenges arising from the implementation of Pakistan’s tax stamp and production monitoring system, during 2021 and 2022, one might say Pakistan is riding a perfect storm.

For a start, the system was implemented in a country with the fifth largest population in the world, and across four major industries – tobacco products, sugar, fertiliser, and cement. So, it has been no mean feat to implement this system on such a massive scale and with such high levels of sales and tax revenues at stake.

Secondly, three out of the four industries – sugar, fertiliser, and cement – are not accustomed to working with tax stamp and production monitoring systems. So, the introduction of such systems into these industries was always going to present operational problems of some kind, especially in relation to their challenging and varied operating environments.

A third challenge has to do with acceptance (or, rather, non-acceptance) of the system by industry players, none of whom enjoy being monitored and regulated by governments.

While the three largest tobacco companies have been fully compliant with the programme since its 1 July launch on tobacco products, a collection of smaller, local tobacco companies are delaying implementation in their facilities by filing legal cases against the Federal Board of Revenue (FBR).

Some manufacturers in the other three industries, meanwhile, have made claims of operational problems reportedly encountered with the system – thereby ‘milking’ the fact that they are new to such systems and operate in very different environments to tobacco.

As an example, a number of fertiliser manufacturers were quick to make the claim to the Finance Minister and FBR that the newly installed production monitoring system was proving to be incompatible in harsh and humid outdoor operating conditions. In particular, they highlighted that a stamp detection efficiency level of as low as 50% had been observed, which was much lower than the authorised benchmark, as well as lower than the 99%+ level reported in the acceptance tests completed with each company.

These companies also advised of errors generated between the stamp reconciliation and production reporting systems, and that despite the best efforts of FBR, as well as the system provider and the industry itself, these technical issues remained unresolved.

Further industry claims were made that the equipment used for the system had been imported and installed without a technical feasibility study having first been conducted on potential effects of the operating environment on this equipment.

As for the sugar sector, while the implementation of the system, in March 22, was deemed successful in that it led to 33%+ higher tax collections during the year that followed, some operational issues were also reported.

Media versus reality

So these were the issues widely reported in the local media. They had the effect of conveying the image of a system that had not been tested beforehand and that was, right from the start, incompatible with the operating environments of different industries.

The reality, however, according to sources familiar with the details of the programme, who spoke to Tax Stamp & Traceability News™ (TSTN), can be summarised by the following sequence of events relating to the above claims made by the fertiliser sector: 

• Production monitoring equipment was fully installed.

• On-site acceptance testing proved 99%+ performance.

• Manufacturers were properly trained on the use of the equipment and the important daily maintenance activities that must continually be performed to maintain accuracy and precision of the equipment.

• Many manufacturers largely ignored the new system and did not conduct the daily maintenance required.

• Based on the above, the overall system performance suffered.

• Manufacturers later made the aforementioned complaints to FBR followed by a press release alleging that the system was not working.

This general lack of cooperation across the different industries was corroborated by Mr Tariq Shaikh, FBR Project Director, in his September 2022 interview with TSTN.

When asked what impediments were encountered during implementation, he replied: ‘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’.

So, an extremely strong level of resistance, and not just from the ‘usual suspect’, tobacco, where the largest manufacturers are now compliant, and the smaller companies are slowly but surely being added to the mix.

Too important not to work

The rollout of the tax stamp and production monitoring system was considered an historic event in the development of Pakistan’s economy. Given that production volumes had grown beyond human counting limits, it was necessary to introduce the automated monitoring of these volumes, as well as automated linking of production data to manufacturers’ tax returns.

Also, by uniquely marking each product and tracing it through the market, the system ensures that no one can hoard products in a bid to control their supply and, consequently, artificially raise their price.

Given the clear benefits of such a system, FBR plans to extend it to other industries, including beverages, petroleum, pharmaceuticals, and steel products. FBR’s commitment to the programme remains strong, as evidenced by its very active and public enforcement of sugar, as the second sugar cane crushing season covered by the programme begins.

Therefore, the faster the country can ride out the current perfect storm of non- cooperation and apparent lack of will by some manufacturers to properly maintain the new system in line with challenging operating environments, the better.