Tobacco industry moves several proposals for budget 2020-21

ISLAMABAD: The tobacco industry has proposed to the government for jacking up Rs400 on tier-1 of Rs5,600 per thousand cigarettes and slash down same amount (Rs400) on tier-2 of Rs1250 per thousand cigarettes in the upcoming budget for 2020-21.

With approval of this proposal for Federal Excise Duty (FED) for the budget makers from one of the major revenue spinners, they estimated that the FBR revenues could go up to Rs140 billion in next fiscal year 2020-21 against projected collection of Rs116 billion in outgoing financial year 2019-20, registering 20 percent increase in tax collection in shape of FED in coming financial year.

The FBR’s revenue has declined with hike in taxes as industry argued that the legitimate volume of production reduced from 65 billion sticks in 2018-19 to 42.6 billion sticks in 2019-20. So the tax revenues also slashed down from Rs124 billion in fiscal year 2018-19 to Rs116 billion in current fiscal year. Against the desired target of Rs147 billion, the FBR has been facing a shortfall of Rs31 billion in the outgoing fiscal year from this sector alone.

According to the working shared with the FBR disclosed that the minimum price of legal packet of cigarettes would go up to Rs66.3 per pack, registering an increase in price of packet by Rs3.58 if the price of cigarettes at tier-1 increased by Rs400 while the same level of amount decreased on tier-2 cigarettes.

The formal tobacco giants operating in the country Pakistan Tobacco Company (PTC) and Philip Moris also proposed to the government to increase advance adjustable FED on un-manufactured tobacco at GLT (Green Leaf Threshing) process from Rs10 per kg to Rs500 per kg. In the last budget, the government had reversed its decision for levying Rs200 per kg tax on tobacco growers at GLT stage and imposed tax of just Rs10 per kg on the pressure of political influence despite this fact that it was adjustable tax and was meant to curb those manufacturers involved in making illicit cigarettes.

The tobacco industry asked the government to revise penal provision on selling cigarettes below the minimum legal retail price as they demanded of extended jurisdiction of Police to take cognizance of this offence, declared it non-bailable offence and increase penalty amount to Rs50,000. They also proposed number of proposals related to Customs and asked for administrative improvements as imported cigarettes should carry health warning, single designated port for import of cigarettes, raw material allowed only to registered cigarettes manufacturers and exclude confiscated/seized cigarettes from the list of auction.

Despite 93% increase in FED rates in 8 month from October 2018 to July 2019, tobacco revenue collected by FBR in the FY 2019/20 would be less that the revenue collected in FY 2018-19. With such major increases in taxes, one would expect government revenues to be increased, however, there exists a large tax evading, Duty Not Paid (DNP) sector that is using these tax increases to its advantage.

The government had forecasted an increase in taxes from the tobacco industry from Rs124 billion to Rs147 billion. As soon as the federal budget was announced, the FBR was all set to achieve these numbers and aggressively started increasing taxes, with a 93% increase in the last 8 months only in tier-II brands and a 30% increase in the excise of tier-I brands.

With every successive excise increase by the government, the price differential between duty not paid and tax paying brands continued to widen resulting in shift of consumption to cheaper tax evaded products. Currently, there is a difference of almost Rs40 between the price of tax evading and tax paying cigarette brands.

“Interestingly, anti-tobacco lobbies keep on pushing the government to increase taxes on tobacco, which serves the objectives of the tobacco tax evading sectors very well because with increase in taxes the products of tax paying manufacturers become more expensive and thus consumption shifts to duty evaded products, which less than the minimum price of pack mandated by FBR and are even less than the minimum tax applicable on a pack of cigarette” one official of formal sector said.

According to a representative of tax compliant industry player, we do not oppose increase in taxes on tobacco provided FBR has the ability to collect the tax from all manufactures but in current situation where almost half of the market share is with tax evaded sector, increasing share of duty not paid sector just reinforces the growing threat to sustainability of government revenues and legal industry operators. If completely eradicated, the government would be able to generate an additional Rs77 billion (estimated) in taxes each year. This is the potential of finishing duty not paid cigarettes, if they are dealt with effectively by the tax authorities, they concluded.