FBR opposes ‘sin tax’ on tobacco industry

ISLAMABAD: The Federal Board of Revenue (FBR) has advised against imposition of sin tax on the tobacco industry, arguing that it would cause substantial revenue loss in the range of Rs25 to 30 billion annually, The News has learnt.

However, the federal cabinet Thursday night could not finalise decision on Health Levy and it was decided that ministers for finance and health would sit together to sort out finances for the health sector. It seems difficult that there be any move on this front till upcoming budget for 2019-20.

“We have taken a clear cut view before the government that there is no need to disturb the existing three tier tax structure on the tobacco industry at this stage because it will cause substantial revenue loss on account of Federal Excise Duty (FED) and Sales Tax (ST)” one top official of the FBR confirmed to The News here on Thursday.

Quoting latest study done by the Pakistan Institute of Development Economics (PIDE), FBR official sources said graphs showed from the Household Income Expenditure Survey (HIES) that tobacco consumption had not decreased because of increased rates of cigarettes rather it shifted from formal to illicit or smuggled cigarettes when the tax burden increased. They said changes in tobacco taxation at this stage would result into placing more complex system so the FBR took decision to oppose this move at this stage.

The debate continues unabated since long whether taxation increase will help reduce consumption at a time when the illicit tobacco possessed major share in the market. The World Health Organization (WHO) recommends increased taxation burden on the tobacco industry that ultimately helps reduce its usage.

However, the tobacco industry has taken stance before the government by stating that the legitimate market possessed 66 percent share while illicit share was standing at 34 percent by March 2018.

They estimated that the formal tobacco sector basically belonged to two giant companies as they were estimated to contribute Rs115 billion in shape of tax collection during the current fiscal year.

The selling price of Value for family brands (VFM) stands at Rs58 per back. On other hand, their study on illicit tobacco showed that their share stood at 34 percent and contribution into national kitty was just 2 percent.

“The government is losing Rs45 billion due to illicit tobacco,” the study estimated and added that the price of VFM stood at Rs28 per packet. This kind of huge differential existed in the market will result into shift from formal to illicit tobacco and the government will get nothing out of it, they added.

In the premium brands, the tobacco industry showed that the total volume stood at 264 million packs and tax per pack was in the range of Rs111 so total collection in shape of Federal Excise Duty (FED) and Sales Tax fetched Rs31 billion.

If Health Tax imposed at packet price of Rs10 the volume of premier brands will slash down by 20 percent so the volume could touch 211 million packs and total collection of FED and Sales Tax could be reduced to Rs23 billion from existing level of Rs31 billion. However, the Health Tax collection could bring Rs2 billion into national kitty for premier brands.

In vase of Value for Family Brands (VFM), the total volume stands at 2.4 billion packs and tax per back was in the range of Rs33 so the total collection of FED and Sales Tax fetched Rs82 billion.

If Health Tax is imposed at rate of Rs10 per pack the consumption would decline by 30 percent and total volume could touch 1.7 billion packs. The tax collection on FED and Sales Tax could be reduced from Rs82 billion to Rs56 billion while the imposition of Health Tax could generate Rs17 billion on per annum basis.

On illicit brands, the total volume has been estimated at 1.4 billion packs while FED and ST collection was estimated at Rs2 billion. With no Health Tax, the volume of illicit tobacco is expected to go up by 56 percent phenomenally while contribution into national kitty would be standing at zero.

Overall the FBR’s collection was projected to decline by 31 percent or Rs34 billion on per annum basis, the tobacco industry’s study concluded.