FBR to submit reply today in PHC over tax reduction on cigarettes

ISLAMABAD: Federal Board of Revenue (FBR) is set to submit its reply today in Peshawar High Court (PHC) over an amendment in the Finance Act 2017 that resulted in the reduction of 33.3 per cent tax on cigarettes of different brands and an increase in the sale of tobacco products.

Earlier on December 26, 2017, PHC while granting a stay order against new taxation rules for the tobacco industry suspended the amendments in Federal Excise Act 2005 that were introduced through the Finance Act 2017. The PHC ordered the FBR to submit a reply in this regard till February 7, 2018.

The lawsuit was filed by Hameed Khan, a resident of Chota Lahore, Swabi through his counsel Babar Khan Yousafzai who argued before the court that price increase on tobacco products is the only way to discourage their consumption among citizens, especially the youth.

“Operation of the impugned bill is hereby suspended,” the court said, giving interim relief to the petitioner.

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Smoking is a known cause of multiple diseases including cancer, chronic heart diseases and breathing ailments, the petitioner argued, adding that it is the responsibility of the state to ensure that all its citizens are provided healthcare systems which cater for treatments of illnesses and ailments. Reportedly, the high prevalence of tobacco use kills more than 110,000 people each year in Pakistan, which is approximately 300 deaths every day.

Pakistan National Heart Association (PANAH) has joined as a party in the case and argued on behalf of the health sector saying that the reduction on taxes on cigarette brands has made smoking accessible to 1,200 new people per day.

Sources in Pakistan Tobacco Company (PTC ) alleged that two close relatives of FBR Chairman Tariq Pasha and one family member of a politician are working with PTC. They are Madeeh Pasha, Hamad Nawaz and Aly Taseer.  They said that Aly Taseer is a family member of a politician, while Madeeh Pasha is a nephew of the FBR chairman and is working in legal and corporate affairs department of PTC. Hamad Nawaz is son-in-law of FBR chairman and is working in supply chain department.

They further alleged that Madeeh Pasha has no experience in regulatory affairs, his experience was in marketing and since his uncle became FBR chief, he has taken the position of regulatory affairs manager.

Official sources in FBR on condition of anonymity informed that FBR is set to end the restrictions on tier-I brands through SRO, which in result will benefit PTC because it (PTC) will take its brands from tier-I to tier-II and will pay only Rs43 tax on its brand instead of Rs74. They said with this move of PTC, cigarette price will witness a decrease and the sale of multinational brands in the country will go up despite the fact that revenue of the FBR will remain the same.

They also said that though FBR had introduced tier-III with the argument that Rs50 billion worth tax evasion takes place in Pakistan, however, the said amount has not reflected in the revenues vis-à-vis cigarettes. In an apparent bid to oust the competition in the tobacco industry, multinational tobacco companies have been pressurising the FBR to introduce 3rd taxation slab in order to make their cigarettes cheap and widely available in the market, said sources.

“FBR is increasing the market share of multinationals because people at FBR believe that local cigarette producers are tax evaders though the production of local cigarettes is supervised as the staff of FBR is appointed on each unit of local cigarette manufacturers,” said sources.

The sources further said that FBR has been reluctant to take action against the smuggled cigarettes which occupy 20 per cent market share as its focus remains on non-FED (federal excise duty) cigarettes which occupy only one per cent market share. They further alleged that this omission is criminal and has been done just because the smuggled products are of the same multinational company which was involved in bribing FBR for tier-III introduction.

It is relevant to mention here that local cigarette industry has been damaged at the cost of rolling out favours to multinationals and there are reports that 10 to 20 units have stopped production. Similarly, a recently published State Bank of Pakistan (SBP) report reveals a 92 per cent increase in cigarettes production whereas the revenue against the sector is slightly over what was collected last year. In this way, the country is losing big time both in terms of health and also not meeting revenue targets. So far, proposals of the tax reforms commission are still to be implemented, while no third party forensic audit of PTC is conducted and the FBR still failed to carry out the system of trace and track to strictly monitor the market of cigarettes in the country.

It is worth mentioning here that it is state’s responsibility to ensure that consumer products which cause harm to the health of its citizens are controlled. Some products such as drugs must be banned out rightly whereas other products such as tobacco must be taxed appropriately to deter their use. The court (PHC) has accepted the petitioner’s argument and granted a stay order against new taxation rules for the tobacco industry.

The petitioner said that changes in the Federal Excise Act 2005 helped the Ministry of Finance to introduce a third tier of taxation which resulted in reduction of tax to Rs16 for cigarettes with on-pack retail price below Rs58.5.

“This was despite the Ministry of National Health Services proposing an increase on all taxes and rejecting the proposal of a third tier,” the court was informed.

The petitioner also maintained that the introduction of the third tier of tax on tobacco products has caused a huge loss to Pakistan due to low tax collection (almost 33 per cent less), closure of local tobacco companies and job losses of around 3,000 employees of closed units in the last four months.

Next hearing of the case is scheduled today (February 7, 2018) while Ministry of Law and Justice, Ministry of National Health Services and FBR are respondents in the case.

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Ahmad Ahmadani
The author is an investigative journalist. He can be reached at [email protected]
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