The ground reality

April 25, 2019

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AWAY from the entire debate surrounding tobacco consumption, there can be no argument about the hardcore legality of tobacco farming and the fact that the crop ensures revenue for the state and employment for the workforce.

Tobacco farming, predominant in the Khyber-Pakhtunkhwa (KP), requires minimal land for cultivation and has the potential to fetch a lucrative price per kilogram. Most of the tobacco farmers of today were originally opium farmers till the government banned its production in 1979 through the Hadd Ordinance and encouraged them to switch to the tobacco crop instead.

According to the Pakistan Tobacco Board, more than 100 million kilogram of tobacco is produced annually in KP and some areas of Punjab. The three most widely used types of tobacco are the Flue Cured Virginia (FCV), Burley and Nicotiana Rustica (White Patta).

Though tobacco is grown on around 0.25 per cent of the total irrigated land in the country, the crop plays an important role in Pakistan’s economy by generating income and employment for farmers, manufacturers, distributors and retailers. A workforce of 350,000 is directly and indirectly employed in the tobacco industry, generating an annual income of roughly Rs.300 billion and a source of livelihood for 1.2 million people.

But for certain impediments, Pakistan can earn foreign exchange, a precious commodity in itself, through export of tobacco products.

There are 75,000 growers producing tobacco all over Pakistan, with more than 45,000 growers located in KP producing 95% of FCV over an area of 30,000 hectares in the districts of Swabi, Mardan, Charsadda, Buner and Mansehra. On average 80-85 million kilogram of FCV, which is the main ingredient of cigarettes, is produced by growers of these districts every year. The sector is also one of the main contributors to the government exchequer and sourced more than Rs476 billion from FY 2013-14 to FY 2017-18 in Federal Excise Duty / Sales Tax according to the Federal Board of Revenue (FBR).

Pakistan is the eighth biggest producer of the tobacco crop in the world, with great potential to become a major export of the country. For the past few years, tobacco exports in Pakistan have been on the rise, with manufacturers exporting 6.8 million kilogram of tobacco worth $16.25 million in 2017-18.

The Pakistan Tobacco Board (PTB), working under the Ministry of Commerce, is the federal authority responsible for regulating the tobacco crop. The PTB ensures that tobacco laws related to the buying of the crop are followed by all manufacturers and the rights of farmers are protected. Key regulation regarding the crop includes the PTB Ordinance, MLO 487 and Tobacco Marketing Rules 1993 and 2016. However, industry insiders believe that the laws are in dire need of being revisited since they do not have proper controls in place to check the flourishing illicit trade in the tobacco industry, which is the biggest issue in the industry; big enough to cause doubts about its sustainability.

According to the PTB Ordinance, tobacco manufacturers, dealers and exporters have to declare to the PTB the amount of tobacco that they intend to buy in the next year, and to ensure that they have contracts in place with respective farmers to meet their quota requirements. This is done to make sure that there is no surplus crop and the farmers may earn sustainable incomes on their production. A Minimum Indicative Price for the crop is also determined by the PTB for the same purpose.

Some illegal buyers and cigarette manufacturers, however, under-declare their quota and buy the crop produced by the farmers at very low rates, depriving the farmers of incomes they deserve to get. These illegal manufacturers also buy non-recommended varieties of the tobacco crop as well as entire crops that are treated with banned protective agents. Illegal manufacturers exploit the loopholes in the law to their advantage, while the farmers get the short end of the stick.

Over the past few years, the quota declared by cigarette manufacturers has been roughly 50 million kilogram, with the lion’s share bought by two multinational manufacturers and the rest by the local entities. According to the PTB, production of FCV leaf is approximately 74-75 million kilogram since 2013 (ranging between 64 million and 90 million kilogram). This in effect means that at least 25 million kilogram, or one third of the crop, is bought and sold illegally in Pakistan, with no quality or price control.

It was also substantiated by the PTB chief in a Report as noted in the minutes of the Senate Standing Committee on National Health Services, Regulation and Coordination. “The Chairman, Pakistan Tobacco Board (PTB) informed the Sub-Committee that they receive demands for tobacco from the tobacco industry at the start of the year and announce it for the growers etc. He informed that the amount of tobacco produced in a year, if converted to cigarettes, accounts for only 60 per cent of the total cigarettes manufactured during the year while the remaining goes unaccounted for. This is usually purchased by market dealers from the open market for the illegal manufacturers. These dealers are not registered with PTB and, therefore, the data of tobacco which they purchase for the illegal manufacturers is not reconciled with the data of PTB”.

This black market leads to another compounding issue; taxation. With such a large black market, the under-declared purchases cannot be taxed at the provincial level by the relevant department. Not only is the government deprived of revenue, this under-declaration eventually compounds the matter of evaded Federal Excise Duties (FEDs). The tax evasion in the industry, which takes roots at the start of the supply chain, is estimated to be Rs35 billion a year.

Farmers are in dire need of support from the government to ensure the protection of their rights under the law and to improve their economic conditions by creating sustainable international market linkages for their produce. For the promotion of exports, the PTB needs to put in place adequate control to ensure that the recommended varieties of tobacco are grown, and the banned crop protection agents are not used in order to be compliant with international obligations including those set by the United Nations Global Compact, the Montreal Agreement and the Stockholm Convention. Farming methods based on new technologies should also be used to improve yields and, in effect, incomes.

The issues faced by tobacco farmers are often overlooked in the agricultural landscape of the country, despite being concentrated in the KP stronghold. The crop has the potential to not only create revenue for the government through taxation, but also boost exports. The government should look to revisit the dated laws from the 1960s that basically allow the black market to flourish. It should also enforce existing laws to ensure good quality crop is produced at the right price and the farmers earn their fair share of the income.