Ministers, MPs hinder increase in tobacco tax: FBR

ISLAMABAD: Conceding political clout being used by the players of tobacco industry as major stumbling block for increasing taxation, the FBR stated that the tax collection from cigarettes would be increased from the existing Rs114 billion to Rs200 billion over next three years.

Addressing at the launch of a research study on “Quantifying the Potential Tax Base of Cigarette Industry in Pakistan” by Social Policy and Development Centre (SPDC) here on Friday, the FBR’s Member Inland Revenue Policy Dr Hamid Ateeq Sarwar cited an example saying when taxation was imposed on tobacco farmers they exerted pressure on the FBR to reverse that. Even the Speaker National Assembly and the KP ministers argued that farmers were suffering and so the tax increase had to be withdrawn, he maintained.

He went on to say that the local players of tobacco industry had representations in the provincial assemblies, National Assembly as well as Senate and the FBR has to consequently face a lot of resistance. He further said the multinational companies have immense political clout and they could go to brief the Prime Minister and Cabinet so it was not an easy thing to formulate policy making in such a difficult environment in case of tobacco industry. He said that the FBR collected Rs114 billion from the tobacco industry in last fiscal year, and it was expected to go up to Rs150 billion in the current fiscal year. He said the FBR is eyeing to surpass Rs200 billion collection from tobacco industry over next three years. After reaching at stage of collecting Rs200 billion on per annum basis, he said the focus would be diverted towards discouraging consumption of tobacco.

He also conceded that under-reporting is a routine as the total production of cigarettes sticks stood at 60 billion instead of 75 billion sticks. He said that enforcement was an issue as out of 10 Green Leaf Threshing Plants, one was shifted into AJK. The Fata jurisdiction is also used to avoid taxes, but FED is liability. There is no GST imposed.

According to the research study launched by the SPDC, the extent of under-reporting of cigarette production by the manufacturing firms is significantly higher in Pakistan, which has negative implications for the government tax revenue.

Muhammad Sabir, Principal Economist at SPDC, presented the findings of the study and said FBR currently relies on voluntary declaration of production by the manufacturers to determine their tax liability. The absence of an integrated information system creates an incentive for under-reporting of production to avoid taxes. The research findings suggest the presence of under-reporting of cigarettes in the range 22 to 47 per cent. The loss of revenue due to undeclared production is estimated to be Rs37 billion in 2016-17, including Federal Excise Duty (FED) of Rs31 billion and General Sales Tax (GST) to the tune of Rs6 billion. The study also revealed that during 2015 and 2016, when tobacco firms reported a decline in their sales, profit margins remained substantially higher compared to the previous years.

The research work also forwarded policy recommendations as at present the FED is collected at factory level on declared production. It was proposed that FED is linked with GST collection, and the GST is collected in VAT mode. The GST should be collected at three stages – factory, distributors and wholesalers/retailors. While FBR is already in the process to implement a system for electronic monitoring of production known as Track and Trace System, the implementation process should follow the existing best practices particularly from developing countries. The study also recommends the FBR to monitor tax evasion by analysing the financial data of the companies. Such analysis will help build a robust tax collection mechanism for future. The study also reveals that the production is generally high during the months before the announcement of federal budget. This is largely an outcome of uncertainties in tax policy. A medium-term tax policy guideline should be followed to avoid major changes in tax rates.

The research is funded by the University of Illinois at Chicago’s (UIC) Institute for Health Research and Policy. Dr Frank J Chaloupka provided an overview of Think Tanks Project: Accelerating Progress on Tobacco Taxes in Low- and Middle-Income Countries. Dr Frank J Chaloupka, Director, UIC’s Health Policy Centre; Dr Pervez Tahir, Former Chief Economist, Government of Pakistan; Hamid Ateeq Sawrar, Member Inland Revenue- Policy, Federal Board of Revenue, Government of Pakistan and Dr Ziauddin Islam, Director, Tobacco Control Cell, Ministry of National Health also presented their insights on the topic. The event was concluded with remarks from Mr Javed Jabbar, Chairman, SPDC.