FBR’s third tax slab and enforcement drive hurts illicit tobacco

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PESHAWAR: The policy from the Federal Board of Revenue (FBR) to introduce a third tax slab for cigarettes and step up its enforcement drive against non-duty paid and smuggled cigarettes has severely hurt the illicit cigarette trade in Pakistan.

At the end of the year 2016, illegal tobacco market in Pakistan had mushroomed to an estimated 40 per cent of the total market, according to State Bank of Pakistan. The demand for illicit cigarettes is mainly driven by the wide price gap between them and brands of the legal playersTax evaded cigarettes are easily available at an average price of Rs20 to Rs25, which is significantly below the minimum selling price but there has been no action from the authorities.

As a result, revenues from the documented tobacco industry reduced to Rs83.69 billion in 2016-17 compared to Rs114.19 billion in 2015-16 and Rs102.88 billion in 2014-15. It has been estimated that the national exchequer had lost more than Rs130 billion over the course of the last five years due to an exponential increase in non-tax paid cigarette sales.

In this context, the FBR had adopted a policy stance in budget 2017-18 to introduce a third slab of cigarette taxation as a way to boost revenue collection from the documented sector and decrease illicit trade of local tax evaded and non-duty paid smuggled/counterfeit cigarettes.

According to sources in the FBR, the third tier has helped in increasing the prices of non-tax paid illegal cigarettes, forcing them to come in the tax net. “Ever since the legitimate industry has been allowed to operate in the third tier, revenues are on an upward trajectory,” the sources commented.

In the presence of these cheap illicit cigarettes, the government has struggled to achieve its public health objectives as smoking incidence in Pakistan has remained relatively stable. From past experience, it is evident that the government’s policy of persistent tax increases on cigarettes has failed to reduce tobacco consumption in the country. As affordability becomes an issue, consumers simply shift to these local tax evaded brands.

Taking strict notice of tax evasion in the tobacco sector, the FBR has constituted a special enforcement network titled at Inland Revenue Enforcement Network, especially to address foreign non-duty paid / counterfeit brand local manufactured non-duty paid cigarette dumping by AJK cigarette manufacturers. In 2017, an estimated 1.63 billion non-duty paid cigarette sticks and raw material of illicit sector worth billions of rupees was seized. The unprecedented crackdown has successfully led to the closure of several warehouses and factories involved in the non-duty paid cigarettes business.

Even though illicit trade has been dented by government actions, it remains a pervasive problem across the country. While the enforcement network can manage to tackle supply side of the problem, the government should show consistency in its taxation policy for cigarettes and enforcement action to ensure that the demand for illegal cigarettes is reduced.