Tobacco firm’s pricing move raises tax evasion risk

ISLAMABAD: A tobacco company has fixed the retail price of one of its brands less than the fixed rate of Federal Excise Duty (FED) of Tier-1, which might raise the risk of alleged tax evasion.

Top official sources told The News on Friday that the company printed the price list of its cigarette brands on August 9 and advertised it’s brand’s price including the sales tax. As per the Federal Excise Act, 2005 Schedule 1, item no. 9, the Federal Excise Duty (FED) on cigarette packets in Tier 1 is Rs330. However, as evident from the advertisement, the retail price mentioned for this brand is less than the applicable FED.

The printed retail price is not only below the applicable duty, but as per section 12, sub-section 4 of the Federal Excise Act, 2005, the retail price does not include any other charges such as the cost of production and other applicable taxes. In view of the above laws, the advertised retail price is allegedly in violation of the minimum FED as defined under the law, and in addition to that the cost of production is not added to the retail price. This resultantly leads not only to alleged evasion of FED but also the sales tax -- higher retail price attracts higher sales tax at the rate of 18 percent.

One official said in background discussions that the same company had in the past challenged the FBR tax demands but the tribunal finally settled the issue in company’s favour.

The sources said the company would pay the fixed FED from its own pockets, adding the company tried to sell out this brand at less than Rs400 mark per packet. However, the sources said that fixation of lesser price would result in lesser collection of 18 percent GST.

According to the Competition Commission of Pakistan (CCP), the FBR can continue to prescribe the minimum retail price for the purpose of levying and collecting taxes.

The Ministry of Health through the Prohibition of Smoking and Protection of Non-Smokers Health Ordinance 2002 had notified that with effect from July 1, 2009, free goods, cash rebates, free samples; discounts, or goods below the market value shall not be given or offered for the purpose of advertisement of tobacco or tobacco products to tobacco consumers to generate sale or promote smoking. To a question, the company’s spokesperson replied that the retail price of the brand has been set in compliance with the provisions of the Federal Excise Act, adding the excise duty is paid by the company at the rates specified under serial number 9 in the First Schedule of the Federal Excise Act and determined by the crossover between two excise rates as mentioned in the Federal Excise Act.

The spokesperson said Excise Duty is discharged accordingly to the tax authorities which in the case of the brand in question is based on Tier 1/Higher Excise Tier.

The spokesperson claimed that as per Federal Excise General Order 3 of 2003, necessary approvals are obtained from the tax authority to clear stock with old printed prices and revised prices are published in local newspapers mentioning Retail Price (excl. Sales tax), Sales tax, and Total printed pack Price.

The company strictly complies with all laws and regulations and remains committed to continuing business in compliance with the laws of the land, the spokesperson maintained.