FBR collects Rs376 bn from tobacco industry during last three years

ISLAMABAD: The Federal Board of Revenue (FBR) has collected Rs376 billion from the tobacco industry during the last three years under the PTI led regime.

According to official data available with The News showed that the Federal Excise Duty (FED) and General Sales Tax (GST) collection from tobacco sector stood at Rs89 billion in 2017/18 whereas tax machinery fetched Rs124 billion in FY 2018/19, Rs117 billion in FY 2019/20 and Rs135 billion in FY-2020/21. This data shows that the FBR collection increased by Rs35 billion in FY 2018/19, Rs28 billion in FY 2019/20 and Rs46 billion in FY-2020/21 over revenue collected in FY-2017/18.

With the help of tax policies of the government, it has collected Rs109 billion additional revenues in the last three years comparing each year to 2018 level. This year’s Rs135 billion tax revenue is 52% higher than the 2017/18 total tax collection from the tobacco industry.

In the Federal Budget 2021/22, tobacco revenue is projected to be Rs155 billion which is Rs65 billion more than the revenue collected in FY 2017/18 resulting in 75% increase.

The FBR’s FY 2021/22 projection is Rs20 billion more revenue will be collected from tobacco sector. Interestingly, out of Rs376 billion tax collected from the tobacco sector from FY 2018/19 to 2020/21, Rs368 billion has been contributed by two companies. While KPK based manufacturers, who enjoy close to 40% share of the market have only contributed Rs8.1 billion during this period, which is around 2% of the total revenue from the sector.

According to an industry analyst, whereas in last 3 years Rs376 billion has been collected from the sector, through elimination of illicit tobacco trade this amount could have been more than Rs600 billion during this period.

According to IPSOS Report on Tax Evasion in five sectors in Pakistan, quantum of tobacco tax revenue evasion is around Rs80 billion annually. Currently, FED and GST on a pack of cigarettes varies from Rs42.12 to Rs130 per pack and minimum legal price of a pack of cigarettes is Rs62.75 but illicit cigarettes manufacturers sell their products much below the minimum legal price and even lower than the minimum tax on a pack of cigarettes.

Tax collection on tobacco can be increased through compliance and enforcement of the minimum legal price per cigarette pack. This measure will also make cigarettes less affordable for the common man and thereby reduce the consumption as well. Currently the prices of some illicit cigarette packets are as low as Rs15. The focus should be to carry out enforcement against such low-priced cigarettes. Local illicit manufacturers, through their political connections, seek increases in tax rates to enjoy the profits of tax evasion by way of the increasing price disparity between duty paid and non-duty paid cigarettes.

During the last 3 years, prices of the brands of the two manufacturers, who have contributed 98% tobacco revenue, have increased by more than 38% due to increase in the FED rates but surprisingly there has been no increase in the prices of brands of the other manufacturers and they continue to sell much below the minimum tax applicable on a pack of cigarettes. Manufacturers arguing for higher FED rates to apply on their businesses seems inconsistent with how businesses operate unless there is evasion of taxes in billions making it a lucrative scheme of illegal profit making by selling cheap cigarettes to the masses.

In the past, year on year exponential increase in FED rates has resulted in decline in government revenues as illicit market shares grew at the back of rising illicit cigarette sales due to the widening price differential between duty paid and non-duty paid products. For example, government increased excise rates excessively between 2015 to 2017, this resulted in the tobacco tax collection to suffer, while total consumption remained the same, but government revenues declined from Rs111 billion in FY 2015/16 to Rs74 billion in 2016/17 and illicit market share grew exponentially.

Such past examples and existing market realities are clear indications that it is important to continue with the current prudent policies enacted by the government in last three years, while carrying out strong enforcement against the illicit cigarette sector to reduce consumption and simultaneously capture increasingly higher government revenues.