ISLAMABAD: The third-tiered structure already imposed on the prices of cigarettes is about to come to an end, as the Finance Ministry is likely to introduce a two-tiered structure for the tobacco sector in the next financial year (FY) 2018-19, it has been reliably learnt.
Well-placed official sources informed Pakistan Today that the finance ministry is all set to take a decision in the next few days regarding the future price of cigarettes in the country. They said the finance ministry is about to withdraw the third tier structure on cigarette prices, following a proposal from the National Assembly Standing Committee on Finance, Revenue and Economic Affairs to introduce a two-tier structure in the tobacco sector.
The NA standing committee in its proposal has recommended finishing the third-tier structure on cigarette prices and asked for the revival of the previous two-tiered structure and has forwarded a proposal to the finance ministry.
The State Minister of Finance Rana Afzal, while talking to the media in the corridors of the parliament house has confirmed receiving the proposals. He informed that the finance ministry has prepared its recommendations in light of proposals submitted by the Ministry of Health, Sustainable Development Policy Institute (SDPI), Pakistan National Heart Association (PANAH), and EY (Ernst and Young), who seem to have come to a consensus to end the three-tiered structure in light of losses to the national exchequer and the overall health crisis caused by the increased consumption.
It was also learnt that a decision with regards to the introduction of a two-tiered structure on cigarette prices will be taken in the next few days.
However, a press release issued by a big multinational tobacco company claims that Federal Board of Revenue (FBR) has decided to fix Federal Excise Duty (FED) target for documented cigarettes industry for 2018-19 in view of policy decision to retain third tier (third slab) of FED on cigarettes in next fiscal year.
The press release read, “According to reliable sources, as cigarettes remained top revenue contributor of the FED within the indirect taxes side, a very challenging FED target would be assigned to the cigarette manufacturers for next fiscal year.”
It further went on to say, “Backing of IR Enforcement network actions against tax evaders in the tobacco sector, the government has decided to further increase actions in the field formations along with the continuation of policy on cigarettes in next budget.”
The press release reiterated, “The steps of 3rd tier slab and IREN actions would effectively counter illicit trade which constitutes 80 per cent of local tax evading brands manufactured in KPK and Azad Jammu and Kashmir (AJ&K), sources added.”
Contradictory to the press release, State Finance Minister Rana Afzal said the ministry of finance has initiated a serious study on the matter and a decision will soon be finalised. The NA standing committee has proposed the introduction of a two-tier structure on cigarette prices because the local industry wanted to keep itself in the lowest slab, while multinational companies were to remain in the highest slab. The local industry is looking for its own advantages, he added.
Moreover, special measures have been taken by the government to curb illicit trade and smuggling of cigarettes in the country, the minister stated. “A decision on the matter will be taken today or tomorrow as we are seriously studying the matter,” added Rana Afzal.
Meanwhile, Public Accounts Committee (PAC) Chairman Syed Khurshid Shah has called on the Federal Board of Revenue’s (FBR) Chairman Tariq Pasha for a meeting on the issue of future prices of cigarettes, decreasing revenues, high death rates caused by tobacco usage, and the ever-increasing rate of smoking. During the meeting, Syed Khurshid Shah raised his voice against the introduction of the third-tier structure and asked the FBR chairman to review it, mainly because the introduction of this structure caused heavy losses to the national exchequer due a sharp decline in revenue collection. Shah said the decrease in federal excise duty has so far increased health-related problems, caused increases in the death rate, and jacked up the rate of smoking in the country.
Earlier, Ernst and Young said in its recommendation that the duty structure of Pakistan, being a developing country, is not aligned with the duty structure of other developing countries. Pakistan may consider adopting an ad valorem duty structure to maintain and gradually increase its FED collection instead of a ‘specific’ duty structure followed by developed countries like USA, Canada, and Australia etc. Furthermore, consumption of tobacco can also be controlled with substantially higher ad valorem rates, then setting a single rate for a whole class of brands, ranging from Rs91 to Rs140.
The Sustainable Development Policy Institute (SDPI) has recommended that the current federal excise duty (FED) should be reverted back to the old two-tier structure and enforcement should also be strengthened for containing the illicit trade of cigarettes in the country.
SDPI, in its pre-budget 2018-19 policy brief titled ‘Government Kitty vs Public Health: The case of Reduction in Prices of Cigarettes’ has presented policy recommendations, urging the government to maintain policy coherence amongst various stakeholders, policy rationalism, and also revert back to the old two-tiered price structure of cigarettes.
According to policy recommendations of the SDPI, there should be policy coherence amongst various stakeholders and a collaborative effort for a phase-wise reduction in smoking. The policymakers should decide on overall national interest, not just sectorial interests. Similarly, there should also be policy rationalism to bring down the illicit trade of cigarette through better enforcement, not through a reduction in prices of cigarettes. Success achieved by IREN should be replicated and up-scaled in the coming years. More, the current FED structure should be reverted back to the old two-tiered structure.
After conducting a study to assess the volume of illicit cigarette brands in Pakistan, the Health Ministry has asked for a policy review regarding the price of cigarettes only to save precious human lives.
The study was done in the backdrop of a claim by the tobacco industry that the market share of illicit brands in Pakistan has risen exponentially due to high tobacco taxes and now stands at 40 per cent of the total cigarette market. However, contrary to the claim of the local tobacco industry about the market share of non-duty paid/illicit cigarette brands, this study has revealed that the actual market share of such cigarettes had stood at 10 per cent, instead of the exaggerated 40 per cent mentioned by the manufacturers in the country.
Nevertheless, the press release issued by a multinational tobacco company continues to present contradictory facts while adding “FBR’s data revealed that before the introduction of the third slab, revenue from tobacco industry dropped from Rs111 billion in 2015/16 to Rs74 billion in 2016/17, a drop of Rs37 billion.”
It added, “In the outgoing fiscal year, the payment of Federal Excise Duty (FED) by two major tobacco companies is expected to visibly boost the revenues as volume shifts from illicit to the legal industry. It is estimated that Rs90 billion of tax revenue will be collected till closure of current financial year which is Rs15 billion more as compared to last financial year.”
The press release claims that according to statistics, Pakistan’s total cigarette market is of 80 billion sticks, while, the total contribution of legal players amounts to about 45 billion sticks. The statement claims that “Over 45 manufacturers are selling more than 200 brands in the market, evading the tax and regulatory laws of the country.”
It added, “The minimum tax applied on a 20 cigarette pack is Rs47.32, however, tax-evaded cigarettes are easily available at an average price of Rs25 to Rs30. The wide price gap between the legal and tax-evaded cigarettes is the key driver of demand for tax evaded cheap cigarettes widely available across the country.”
Taking cognizance of the gravity of the matter, National Health Services, Regulation and Coordination Ministry has already requested Federal Board of Revenue to reconsider the policy of reducing cigarette prices and withdraw the 3rd slab created in Finance Act 2017 immediately to save lives of people of Pakistan.
The Senate Committee on National Health Services, Regulations and Coordination (NHSRC), in its meeting held on December 5, 2017, has taken strong notice of the decrease in the prices of cigarettes and strongly recommended to FBR to reconsider the policy. The committee has also directed the FBR to carry out a three-year audit of tobacco companies to determine whether they are involved in tax evasion and recommended to introduce the tracking and tracing system for tobacco companies to stop tax evasion.
Reportedly, every year, over 160,100 of the people in the country are killed by tobacco-caused diseases. Still, more than 125,000 children (10-14 years old) and 14.73 million adults (15+ years old) continue using tobacco each day. Currently, as per reports from a summit in Cape Town (South Africa), deaths from cigarettes in Pakistan have amounted to 1,60,000.
Surprisingly, Pakistan Tobacco Board promotes tobacco cultivation while FBR has protected local industry at the cost of increased smoking prevalence. And the Ministry of Health is all out against the open sale of cigarette in the price and recently banned the sale of loose cigarette in the country. But, the price of a pack of cigarette is significantly low if compares to the price with other countries of the region such as Sri Lanka, Saudi Arabia, India, Bangladesh, Iran etc. Apparently, with the introduction of 3rd tier, the prices of cigarettes dropped and consumption increases.
It is worth mentioning here that Pakistan was a signatory of the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC), and under the treaty, the government is bound to increase taxes to reduce tobacco consumption in the country.
