Plan to generate Rs260b revenue put up with govt

Islamabad : As Pakistan continues to lose billions every year due to illicit tobacco trade, high-handedness of multinational companies and loopholes in the system, a local firm has proposed a plan to generate up to Rs260 billion revenue without increasing the consumption and rescue the struggling local industry.

The proposal, by the Pakistan Cigarette Manufacturers Association, has been floated to the government’s team, which is in the process of making national budget in the midst of coronavirus pandemic, which has shattered the country’s fragile economy.

“We anticipate that our proposal has the potential to substantially increase duty paid volume (whilst not increasing consumption) and Federal Excise Duty (FED) revenue to reach Rs260 billion annually at the end of the programme,” said Sajid Khan, representative of the association, who floated the proposal based on a detailed study about key issues related to the industry.

The seven-year plan, based on a detailed study, will not only help a steady increase of revenue it will also provide a breathing space for the local tobacco companies whose competitiveness is eroding due to international brands’ high-handedness who may not survive if changes are not made in the existing system.

Since proposed control framework cannot be sustained by the FBR in isolation, it was recommended that a multi-stakeholder Illicit Trade Enforcement Board is established consistent with best practice from overseas (notably Australia, Canada and the United Kingdom).

It also said that success of the proposal hinges on government’s commitment to enforcement so that all economic operators, large and small, local and foreign, participate to the fullest extent, it said.

Talking about major factors responsible for sub-optimal government revenue that has the local firms and brands out of the competition, three tier structure and illicit tobacco trade which fluctuates with NGO estimates of 10% of the market to MNC’s estimates of 33% of the market were identified.

To address the issues, the government has been proposed to make a temporary change to the current FED structure by splitting the current second tier into a mid-price tier and a local-price tier. Critical to the success of the programme, is that there is a guaranteed, but reducing minimum price differential between international and local brands.

The proposal said that currently FED in the second tier represents 53% of the minimum price. It is proposed that in the programme, this ratio is retained through the course of the programme for both the premium and mid-price tiers and for the proposed local tier with reference to its own minimum price.

Retaining the 53% ratio means that FED rates are increased each year proportionate to the minimum price increase and that there is a fair and equitable fiscal contribution from all segments in the market. Given that the minimum price for local brands increases faster than that of Premium or Mid-priced brands, the fiscal contribution of local brands is foreseen to grow faster, achieving a converging effect. While talking about elimination of illicit trade from the tobacco market, the proposal said that the FBR should produce and validate an accurate register of the domestic manufacturing locations, strict enforcement of license criteria to operate machinery, require the machinery owners/operators to accurately report monthly quantities produced of each brand as well as the quantities sold ex-factor to distribution entities.

In order to curb illegal import, the proposal said there should be designation of a limited number of designated import stations for tobacco products.