Third tier of duty on cigarettes boosting revenue

ISLAMABAD: Special Assistant to the Prime Minister on Revenue Haroon Akhtar says the introduction of the third tier of excise duty on cigarettes has produced three major positive impacts – significant revenue growth, curtailment of illicit trade and drop in the number of smokers.

“The market share of the illicit cigarette trade had gone over to 42pc, which the third tier has now brought down to 35pc that will drop to 27pc in a couple of years,” he told The News when asked about the effect, adverse or encouraging, of last fiscal’s new taxation.

Haroon Akhtar stated that there is no move as of now to discontinue the third tier. He said the lobby that is vigorously working for its abolition has lost steam. He said that being undocumented because of unwillingness of its operators the illicit trade is not paying any taxes that are due from them. The minimum price of one pack of cigarette is around Rs48 but those doing illegitimate business are still selling it for Rs25 because they are not contributing anything to the public exchequer.

The special assistant said the unlawful trade continues to come out with new unique brands after their previous products come to the notice of authorities which start investigation into the illegality.

Haroon Akhtar said the illicit traders do not inscribe on the cigarette packets the warnings recommended by the Pakistan government and World Health Organization (WHO). They give incentives to the retailers to sell their products. He said that the gross illegal activity was taking place for years before the eyes of authorities which, however, have been unable to check it to get something for the public kitty. “On the one side is the undocumented business while on the other is the documented trade.”

The special assistant said if one truckload of cigarettes doesn’t pay the due duty to the government, a sum of Rs6 million is lost. “It is not very difficult to count hundreds of billions of rupees the government loses every year due to the illicit trade.”

Haroon Akhtar said when raids are conducted in the mainland by authorities, those engaged in illegal business shift it to Azad Kashmir to take it out of Pakistan’s control. He said he would avoid to list the avenues where the illegal money gotten from this illicit trade is being used.

Meanwhile, the government revenue recorded a whopping increase of more than 20pc after the introduction of the third tier of excise duty. Official data reveals that the government revenue had reduced to Rs74bn from Rs111bn in 2016-17 and was set to dip even further. However, due tier and its effective enforcement, the revenue is expected to increase to more than Rs90 billion.

This surge is corroborated by a decline in illicit cigarettes trade post fiscal and enforcement measures. These actions resulted in curbing the aggressive growth of non-tax paid cigarettes, creating major disruptions in their supply chains. However, the journey to eliminate the non-tax paid cigarettes is far from over and law enforcement agencies are already facing many difficulties. After the third tier and its across-the-board enforcement, illicit market share started declining.

It is stated that this is because the non-duty paid sector is coming up with innovative ways to create hindrances in enforcement of the third tier. They have launched more than 15 brands already, have started shifting their manufacturing hubs from Khyber Pakhtunkhwa (KP) into Azad Kashmir with warehousing facilities in private residences. Experts say prices of the non-tax paid brands are very low, ranging between Rs25 to Rs30, and with recent enforcement initiatives by the law enforcement agencies, illicit manufacturers are forced to reduce their prices even lower.

Realizing this as a national concern, in 2017 the government launched a massive crackdown against the non-tax paid cigarette manufacturers. To address this, it introduced a combination of initiatives. In the federal budget 2017-18, the third tier was introduced in the excise structure to bring the illicit market within the tax net. Its enforcement allowed the legitimate cigarette industry to place its brands in this segment and helped in pulling the prices of non-tax paid brands upwards. After the introduction of third tier the price differential between non-duty paid brands and legitimate ones reduced from Rs44 to half, Rs22.

The government also introduced a minimum price law and stricter penalties on sale and purchase of non-tax paid cigarettes. The illicit market share was feared to cross 50pc if there been no third-tier.

Officials said that a dedicated taskforce called the Inland Revenue Enforcement Network (IREN) was also formed by the Federal Board of Revenue (FBR) to curb the sales of illicit cigarettes that were causing losses of around Rs40 billion annually to the national exchequer.

The last five years data suggests that the total loss to the government kitty crossed Rs150 billion in the shape of federal excise duty (FED) and sales tax revenues due to the growth of the illegal sector. This initiative allowed the government to seize more than 1.5 billion sticks that are worth millions of rupees and seal 10 factories of non-tax paid cigarette manufacturers in KP.

The government launched massive campaigns for awareness regarding the sale, purchase and even possession of non-tax paid cigarettes thereby creating deterrence for consumers, retailers, distributors and manufacturers.

The WHO recognizes illicit cigarette trade as a global phenomenon and states that nearly 10% of the entire cigarette trade is illicit, significantly higher in low- and middle-income countries, up to 50% and more.

While the market share of illicit sector is very high, the contribution to the government revenue is only 2pc whereas the legitimate industry is responsible for the remainder 98pc.

It is estimated that more than 35 billion cigarettes volume shifted to the non-duty paid sector in the last few years alone. This has been reflected by the fact that in the last five/six years, the cigarette market has been stable at 80 billion sticks. However, volumes were shifting to the illicit sector. Majority of illicit trade is home-grown, which is being done by people living in Pakistan.

Research shows that more than 80pc of Pakistan’s illicit cigarette problem stems from locally manufactured tax-evaded cigarettes. At least 40 local manufacturers are selling approximately 200 plus brands and evading more than approximately Rs40 billion duty and tax.

Officials said that illicit players are not only involved in fiscal evasion but in various other regulatory circumventions as well. While the law prohibits any cash prizes or discounts to consumers, the illegal manufacturers are openly giving discounts, cash prizes, rebates and gifts to consumers.

The FBR’s recent introduction of 5pc adjustable advance tax on the purchase value of tobacco from cigarette manufacturers has been strongly opposed by illicit producers.

Official said this advance tax is adjustable and is already being collected from the legitimate players. The measure has been introduced to monitor and curtail the manufacture and sale of non-duty paid cigarettes which is why the illicit manufacturers have taken a strong opposition to it. Obviously, taxation and documentation is not a forte of illicit operators, who the brunt with such a law.

Local cigarette manufacturers operating out of Azad Kashmir also recently went to the Lahore High Court (LHC) taking the plea that the IREN is not competent to intercept or check cigarettes manufactured in Azad Kashmir but the petition was dismissed. The LHC held that the Pakistani tax authorities have the legal power to check, inspect and monitor the trade of cigarettes within Pakistan and if any movement is against the law, they can seize the non-duty paid cigarettes allowing tax authorities to effectively check the cigarettes manufactured in Azad Kashmir and brought into the territorial jurisdiction of Pakistan.

Of the two types of cigarette industries in Pakistan – a legally compliant and an illegal sector operating openly -, the illegitimate market has been growing due to an increasing price differential between the two types.

The illicit sector, with brands selling much below the government mandated minimum price, continues to be the biggest threat to the national public health agenda and revenues. In view of the unique market dynamics and operating environment, there is need to adopt even more aggressive approach of enforcement of all applicable laws against the illicit manufacturers of cigarettes.

Meanwhile, the National Health Services, Regulation and Coordination Ministry has requested the FBR to reconsider the policy of reducing cigarette prices and withdraw the third slab to save lives of people of Pakistan.