Tax cut on cigarettes didn’t benefit govt

ISLAMABAD: A special committee of the Senate, after a thorough review of the taxation system introduced on tobacco products, has concluded that lowering taxes on tobacco products only benefitted the multinational companies with minimal positive impact on the tax revenues of the government.

The report of the special committee on causes of decline in tax collection of tobacco sector narrated that the tax collection from tobacco products declined from Rs114 billion in 2016 to Rs82 billion in 2017 and as a result taxes were reduced on tobacco products but that only enhanced the sales revenues of two major companies.

“After a sudden decline in tax collection from the tobacco sector, the third tier of taxation (lowering of taxes) was introduced for cigarettes manufactured in the country. This was done on the basis of various reports claiming that the market share of the legitimate sector had been eroded due to smuggling of international brands, production of duty non paid and production of counterfeit cigarettes. The third tier was meant to increase tax revenues for the government to similar figures as seen in the year 2016. Because the three-tier policy was introduced as a kneejerk reaction rather than a result of a thorough study of the sector, the three-tier policy had a minimal positive impact on the tax revenues of the government but instead benefited the multinationals in increasing profits substantially. This committee heard all relevant stakeholders and came to the conclusion that the causes of decline in taxes were directly attributable to the lowering of taxes in the three-tier system,” says the executive summary of the senate’s special committee’s report.

The committee was headed by Senator Kulsoom Perveen. The report says that the committee held discussions with all the stakeholders including the Federal Board of Revenue and tobacco manufacturers and narrated the following achievements of the committee:-

“Persistent supervision of the Committee has brought about substantial improvement in revenue collection of tobacco sector:- In order to curb evasion of duty on cigarettes and to monitor purchases and procurement of unmanufactured tobacco for manufacture of cigarettes, FED Rules, 2005 have been amended providing for posting of IR officers at GLT for monitoring of production and transfer of tobacco and proper documentation thereof.

Issue of SRO 1149. In order to protect the business interests of the growers and commercial dealers of unmanufactured tobacco the Member, FBR has held a meeting with the stakeholders. The FBR chairman has assured to the Committee to resolve the issue.

Tracking of Cigarette packs: FBR is now in pursuance of introducing of tracking of cigarette packs being sold in the country by introducing modern tracking system. Display of data of production and sales of cigarettes in the country on the website of FBR: on the recommendation of the Committee, the FBR has started to display data of production and sales of cigarettes in the country on the website of FBR.

Closure of illegal tobacco manufacturing units in the country: On the recommendation of the Committee, the FBR has reported to close two illegal cigarette manufacturing units operating in RTO Peshawar region. Now, no illegal cigarette manufacturing unit is operating in the country.”

As a result of the above mentioned steps, the FBR would be able to collect Rs115 billion in the current fiscal year. The tax collection may further be increased if recommendations of the Committee are implemented in letter and spirit, says the report.

The committee has recommended that to remove the three-tier taxation system on cigarettes and revert to the two-tier system; systematically increase FED on cigarettes every year to comply with the WHO FCTC rules and increase government revenues as proved elsewhere in the world; A comprehensive strategy be devised to stop smuggling of international brands, production of duty non-paid and counterfeit cigarettes in the country; all the stakeholders including PANAH, tobacco growers, multinational companies, local manufacturers of cigarettes, the ministries of board by the FBR while revising taxation of tobacco sector and the FBR should immediately withdraw the SRO No 1149 in order to address the problems being faced by the commercial dealers of tobacco.

The FBR in its report to the committee had submitted that there are two main components of the tobacco industry viz legitimate taxpaying industry and illegally operating illicit sector. The FBR stated that illicit trade share was approximately 36.2 percent during the fiscal year 2017-2018. The FBR had been collecting FED on the basis of 2-tier since 2013-14. In 2015-16, total collection of FED from tobacco sector was Rs90.435 billion out of which two major multinational companies - contributed Rs89.255 billion and Rs1.487 billion contributed by the local manufacturers. In 2016-17, total collection from tobacco sector was Rs66.131 billion out of which two major aforementioned multinational companies contributed Rs64.644 billion while local manufacturers contributed Rs1.487 billion. To cope with the situation, FBR introduced a 3-tier based FED structure in Finance Bill 2017 in which third tier was introduced with almost 50 percent cut in the FED rate on the premise that because of previous high FED rate for second tier, the prices of the duty paying legitimate brands got so high that the consumers started substituting them with duty non-paid illicit brands available in the market at price range of Rs25 to Rs30 per pack of 20 cigarettes. However, the revenue collection observed sharp decline in the financial year 2016-17 and fell from Rs114,275 million to Rs83,764 million. Main reason for this shortfall was that price of cigarettes, particularly of 2-tier consumed by lower and middle income groups marketed by duty paying cigarette industry, rose to the price levels of around 72 per 20 cigarette whereas cigarettes marketed by non duty paying illegitimate cigarette industry were available in the market in the price range of Rs25 to Rs30 per 20 cigarette packet which led to decline in the market share of duty paying legitimate multinational companies, which contribute approximately 98 percent of tax revenues from tobacco industry.

FBR stated that market share of the aforesaid companies fell from 67.72 percent to 36.60 percent in the financial year 2016-17. The reason for decline was that tier-2 brands marketed by these companies were priced around Rs72 per 20 cigarettes packet whereas tier-2 brands marketed by non duty paying segment were available in the price range of Rs25 to 30 per 20 cigarettes packet. FBR, to regain lost revenues of the government introduced a third tier of FED through Finance Act, 2017 prescribing FED @ Rs800 per thousand cigarettes which has enabled duty paying cigarette industry to market lower brands at around Rs48 per 20 cigarettes packet. Introduction of third tier in FED helped duty paying industries in regaining their lost volumes of sale, which led to increase in the revenues of the government. The FED and Sales Tax Revenue Collection stood at Rs87,529 million in the financial year 2017-18 which marked almost Rs4 billion increase as compared to the revenues collected in the financial year 2016-17.