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Govt asked to continue 3rd tier slab system for tobacco taxation

By Mehtab Haider
March 26, 2018

ISLAMABAD: With expected tax contribution close to Rs100 billion in the outgoing fiscal year, the tobacco industry has proposed to the government to stick to the policy of third tier slab system for taxation purposes in the upcoming budget for 2018-19.

The tobacco industry has started lobbying for continuation of this policy in the coming budget as they consider it as appropriate for curbing the menace of illicit trade in Pakistan.

In background discussions with a selected group of reporters, the representatives of formal sector stated that at the end of the year 2016, the market share of legitimate and illegal cigarette trade in Pakistan stood at 60% and 40% respectively in Pakistan.

“The menace of illicit cigarette was causing a loss of an estimated Rs40 billion annually to the national exchequer,” they stated.

It has been estimated that national exchequer had suffered tax revenue loss of over Rs130 billion due to the exponential increases in non-tax paid cigarette sales over the course of last five years.

After careful deliberations in budget 2017-18, the FBR had adopted a policy stance to introduce the third slab of cigarette taxation as a way to boost revenue collection from documented sector and decrease illicit trade of non-duty paid smuggled/counterfeit cigarettes.

According to officials, the government realised that despite increasing the duties on cigarettes, the tobacco consumption was not decreasing.

There was a huge price gap between the legal industry and tax evading packs that sold at much lower prices. This led to a shift in the market as the people started shifting from the legitimate brands to non-tax paying brands.

Therefore, it was decided to introduce the third tier of cigarettes along with establishing a minimum selling price, introducing stricter penalties for tax evaders and creation of an enforcement hub

Although the decision had faced criticism, the Senate Standing Committee has also concluded that the introduction of third tier was intended to curb illicit trade and not a violation of any international commitments.

Figures of FBR show that before introduction of the third slab, revenue from tobacco industry stood at Rs88.40 billion in 2013-14; Rs102.88 billion in 2014-15; Rs114.19 billion in 2015-16 and Rs83.69 billion in 2016-17. While it is too early to comment on revenue collection estimates for this fiscal year, the initial signs are encouraging as FED payments by two leading cigarette manufacturers have improved as volumes shift back to the legitimate sector.

According to the industry source, the third tier has helped in pulling the prices of non-tax paid upwards, compelling them to come in the tax net. Since the legitimate industry was allowed to operate in the third tier, revenues started witnessing an upward trend, the sources added.

Experts have pointed out that consistency in tobacco taxation policy and strict enforcement efforts are vital to overcome the challenge of illicit cigarette trade in the country.

To achieve its tax collection target and control proliferation of non-tax paid cigarettes, the government should focus on continuity of policy measures and ensure their effectiveness by monitoring compliance of the minimum pack price as stipulated by law, they added.

The FBR should be appreciated for unprecedented crackdown against illicit trade in cigarettes. The government should continue to develop and implement strategies to combat illegal cigarette trade in Pakistan. In 2017, the IREN seized approximately 1.63 billion non-duty paid cigarette sticks and raw material of illicit sector

The FBR’s field formations, including Intelligence and Investigation-Inland Revenue (I&I-IR) and Regional Tax Offices (RTOs) are operating in liaison with IREN against the illicit tobacco manufacturers, suppliers and traders in Karachi, Lahore, Islamabad, Rawalpindi, Quetta, Peshawar, Faisalabad, Hyderabad, Sahiwal, Attock, Muzaffarabad, Mirpur and other major cities of Pakistan and Azad Jammu and Kashmir (AJK) that were regarded as hubs of illicit tobacco.