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Tobacco sector in support of increasing advance FED

Islamabad

May 14, 2020

Islamabad : The legitimate tobacco industry has attributed the cause of decreasing revenue from the tobacco sector in the current fiscal year to weak enforcement, increasing FED and the decrease in advanced adjustable FED of Rs300/kg to Rs10/kg, which has led an increase in the share of illicit cigarette trade now standing at 37.4%.

In March 2017, the illicit tobacco sector was at its peak touching 41% market share of the total tobacco industry in Pakistan. The Government was faced with massive revenue shortfalls from the tobacco sector, which declined by 33% from Rs110.7 billion in 2016. The then government decided to introduce two important fiscal measures in the federal budget 2017-2018, first being the reintroduction of 3rd tier in excise structure and the second being the introduction of advanced adjustable FED at the rate of Rs10 per kg tobacco.

The 3rd tier excise structure allowed the legitimate sector to reposition their brands and bridge the price gap between their and illicit cigarette brands, allowing price sensitive consumers to move back up the ladder who had down traded to low quality cheap cigarettes because of the increasing price differential.

While the move to introduce advanced adjustable FED of Rs10/kg aimed at documenting the tobacco purchases by all manufacturers, who would pay the FED of Rs10/kg during the Green Leaf Threshing (GLT) process of converting tobacco leaf into processed tobacco, without which cigarettes cannot be manufactured, enabling FBR to document the processed tobacco by every manufacturer. These measures coupled with strong enforcement decreased the market share of illicit cigarette manufacturers from 41% to 34% in a span of one year increasing the government revenue back multifold.

In 2018, the government decided to increase this tax to Rs300/kg in the mini budget so to further increase the cost of tax evasion for the illicit manufacturers. This came as a brutal hit to the illicit manufacturers who decided to use the power corridors of national and provincial assemblies to drive their campaign. National Assembly speaker made a committee that included senators, senior federal and provincial ministers, ironically, some members like Senator Dilawar Khan, Shahram Khan Tarakai, Atif Khan belong to the tobacco business and were owners of illicit cigarette manufacturing units and were the very same people getting affected by this law.

They managed to succeed in this campaign and in the 2019 budget, not only was this tax reverted to Rs10 per kg but the illicit manufacturers also managed to succeed in eliminating the 3rd tier in the excise structure bringing it back to two-tier. The excise rates have increased by more than 93% in the last 18 months and it has reflected in the market share of duty not paid cigarettes, which went up to 37.6% in March 2020 causing the Government a potential revenue loss of Rs63 billion.

Legitimate tobacco industry demands that advance adjustable FED tax not only be increased but it should be increased to Rs500/kg to increase the cost of tax evasion for the illicit cigarette manufacturers. They will be forced to document and declare their tobacco purchasing and processing and will be liable to pay their dues to the government of Pakistan as per their sales & revenues. The government is currently losing out on potential revenue of more than Rs60 billion, which is going straight into the pockets of these illegal manufacturers and helping them to navigate their ways into the power corridors of this country allowing them to maneuver the laws and pressurize the decision makers to enact regulations favoring them.