Tobacco industry calls for third tier taxation slab

ISLAMABAD: The tobacco industry has claimed that the share of illicit trade would have risen to 50 percent if the FBR had not introduced the third tier of taxation slabs for the cigarettes industry.

In background discussions here, the tobacco industry stated on Monday that the introduction of the third tier helped the government revenues to resume an upward trajectory and could further increase if an audit of the tobacco sector was extended to the retail sector for effective enforcement of the minimum price law.

“The introduction of third tier has halted the decline in government revenues due to an increase in the illicit trade of over 40% of the market,” stated the industry representatives. The FBR’s data shows that before the introduction of the third slab, revenue from the tobacco industry stood at Rs88.40 billion in financial year 2013-14; Rs102.88 billion in 2014-15; Rs114.19 billion in 2015-16 and Rs83.69 billion in 2016.

It is discernible that if no third tier had been introduced, then the share of trading through illicit means in the tobacco industry would have risen as high as 50 per cent, with revenues dipping to as low as Rs60 billion; therefore, the FBR is optimist that the third tier of FED on cigarettes has not only arrested a decline in the revenues but resulted in increase in the FED collection in 2017-18 which may cross Rs90 billion by the end of 2017-18. Consistency in fiscal policy and enforcement drive is expected to boost government revenues.

The legitimate industry fell from 66.3 billion sticks in 2012/13 to 29.2 billion sticks in 2016/17--a volume shift of 37 billion sticks to the illicit sector. After the introduction of the third tier, the price differential between non-duty paid brands and legitimate brands was halved from Rs44 to Rs22. This price differential had been increasing year on year due to excessive excise led price increases by the legitimate industry. 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. The FBR has acknowledged the fact that there is a decrease in the illicit trade of cigarettes from 45 per cent to 35 per cent due to enforcement action of the Inland Revenue (IR) Enforcement Network on the illicit tobacco/cigarette trade and the third tier/slab (FED) on cigarettes.

The suggestion by the Public Accounts Committee (PAC) Chairman Syed Khursheed Shah to conduct a tax audit of the tobacco sector is a positive step. However, the desired results of this audit can only be achieved if it is extended to the retail sector.

All local manufacturers print the minimum price of Rs48 on their pack so there is no way to validate if the pack is tax paid or not until a test purchase is made or asking specifically to the retailer the price of these illicit brands manufactured in Mardan and Azad Jammu & Kashmir (AJ&K). All local manufacturers print the minimum price of Rs48 on their packs. However, tax evaded cigarettes are easily available at an average price of Rs25 to Rs30.

It is wrongly assumed that all local manufacturers are tax compliant, and there is no illicit cigarette production from them. This contradicts with the huge seizures equivalent to 1.6 billion sticks of cigarettes, and raids on illegal warehouses and factories by the enforcement agencies.

The real issue is enforcement of the minimum price law set by the government. Wide price gap between the legal and the tax evaded cigarettes is the key driver of demand for tax evaded cheap cigarettes widely available across the country, they concluded.