FBR mulls three-tier duty system for cigarettes

KARACHI: A three-tier system to collect federal excise duty on production and supply of tobacco products has been finalised for reintroduction through Finance Bill, 2021, sources said on Friday.

Federal Board of Revenue (FBR) sources said the matter of massive duty evasion and prevalence of smuggled products had compelled the authorities to find a way to maximise documentation of manufactured products.

They said the tax authorities and stakeholders were mulling re-introduction of a three-tier system. The issue was discussed in detail after capturing all relevant data of the tobacco industry.

At present there are around 41 cigarette manufacturers in the country. However, two companies have 96 percent industry share in payment of duty and taxes. The FBR considered stakeholders’ budget proposals, which explained that existing higher duty and tax rates encouraged evasion and use of smuggled cigarettes.

Sources said this was despite knowing the fact that existing duty rates on tobacco products were lower than international rates. Previously, the three-tier structure was introduced through Finance Act, 2018. However, only after one year this system was abolished as the FBR had suffered about Rs30 billion revenue losses under this head.

According to a study conducted by the FBR, the enforcement of the three-tier system would not affect revenue collection but it would discourage duty evasions and smuggled cigarettes.

“The FBR is collecting around Rs125 billion as tax revenue from the tobacco industry,” sources said. Though the implementation of the three-tier system may not yield more revenue, it would document around 20 billion cigarette sticks, they added. Sources said the three-tier duty system was being proposed at a time when the government had shown intention to launch a track and trace system from July 1, 2021. Under the track and trace system each packet of cigarettes would be monitored, which would help the tax authorities identify duty evasion and smuggled products.

Recently, Philip Morris (Pakistan) Limited through a statement urged uniform implementation of policies and national laws to protect the tobacco industries. Tax-paying cigarette industry is among sectors which were facing a crisis due to non-uniform application of laws and mushroom growth of tax-evaded illicit cigarette trade.

It said that more than 40 percent of the market was illegal and tax-evaded illicit brands were publically available without any check, which inflicted an estimated loss of Rs70-77 billion.

Back in 2013, the share of tax-evaded illicit sector was 23 percent, but due to lack of policies and systems to counter illicit trade, it has now captured almost half of the market.

If the policies continue in the same direction without taking into account a result-oriented approach, it is very likely that the tax-evaded illicit cigarette market share will further increase. This would not only hurt the law abiding legal sector, but also be a serious blow to government’s documentation efforts and tobacco control laws, it noted.