PAC summons FBR chairman over reduction in tax collection from tobacco sector

ISLAMABAD: The Federal Board of Revenue (FBR) has retained the third slab of federal excise duty (FED) on cigarette prices and sat aside stakeholder’s recommendations, asking to jack up the FED of first two slabs in the finance bill 2018-19, it was learnt.

Rejecting the recommendations of the Ministry of Health, the National Assembly Standing Committee on Finance and the Chairman Public Accounts Committee (PAC) to jack up the FED imposed on cigarette prices by Rs44 per pack, FBR has increased FED rate by only 96 paisa per pack of cigarette in the Finance Bill 2018-19.

According to the Finance Bill 2018-19, FBR has increased FED by 6 per cent for all three tiers of cigarette prices. For the first slab on cigarette price, FED of Rs4.48 per pack while Rs2.00/pack for the second slab, and only 96 paisas per pack on the third slab.

Taking cognizance of the decrease in tax collection from tobacco manufacturing industry, Chairman PAC Syed Khurshid Shah has summoned Chairman FBR to appear today (Thursday) before the PAC. And, a summon notice has been forwarded to the chairman FBR to ensure his presence on the occasion.

Sources in FBR on condition of anonymity said that FBR has collected only Rs87 billion from the tobacco sector of the country during the ongoing financial year which is far behind the actual target of Rs120 billion. They said that although the production of cigarettes increased by 100 per cent, FBR’s tax collection from tobacco sector has witnessed a 10 pc decline during the said year. However, FBR has rejected the recommendations of Health Ministry, parliamentary panel, NGOs, think tanks, and retained the third tier of structure on cigarette prices in the finance bill 2018-19.

“Due to the introduction of the third slab on cigarette prices, FED was reduced from Rs33 to Rs16 per pack of cigarettes which resulted in an increase in the production of cigarettes in the country. Similarly, the turn over of cigarette manufacturing companies increased by upto 118 per cent, while the FBR could collect only Rs87 billion against the target of Rs120bn,” said sources.

The sources also informed that due to FBR’s measures, cigarette production would touch 60 billion annually, while around 2.5 million young people will become smokers and the national exchequer will face almost Rs40 billion in revenue losses during the current fiscal year, only because of cheaper prices of cigarettes in the country.

Surprisingly, Pakistan is 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. However, FBR has finally declined to withdraw third tier structure which has so far apparently causea d massive increase in death rate due to ever increasing smoking rate in the country. The FBR has rejected the recommendations of Health Ministry, Chairman Public Accounts Committee (PAC), Standing Committee of National Assembly and Senate, Sustainable Policy Development Institute (a think tank), PANAH (Pakistan National Heart Association) and maintained third tier structure on future cigarette price in the finance act 2018.

The NA standing committee in its proposal recommended finishing the third-tier structure on cigarette prices and asked for the revival of the previous two-tiered structure and forwarded the proposal to the finance ministry.

In the recent past, the Public Accounts Committee (PAC) Chairman Syed Khurshid Shah in a meeting with the Federal Board of Revenue’s (FBR) Chairman Tariq Pasha discussed 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 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.

Meanwhile, 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.

Taking cognizance of the gravity of the matter, National Health Services, Regulation and Coordination Ministry has also 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.

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.

Sources in tobacco industry informed that the introduction of a third tier of taxation on cigarette prices has so far resulted in an increase in the revenue of Multinational Companies (MNCs) as the consumption of their brands of cigarette increased while almost 10 local cigarette factories closed down. Illicit trade of smuggled/non-duty paid cigarettes has also increased due to the closure of the local industry, said sources.

“The MNCs are wiping out local producers from the market due to the current policies implemented by FBR,” said sources.

As per the available data, the revenue target of tobacco sector for the year 2013-14 was Rs88.4 billion, Rs102.88 billion for 2014-15, Rs114.19 billion for 2015-16, Rs83.69 billion for 2016-17, and Rs126 billion for 2017-18, despite the introduction of tier-3 taxation on cigarette prices.

It is worth mentioning that In the Finance Act 2017, a new slab with a reduction in FED (i-e Rs16) was created. According to FBR, the third tier was introduced to tackle the menace of illicit, non-duty paid cigarettes, besides significant growth in revenue, was also expected.

Besides, 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 cigarettes in the price and recently banned the sale of loose cigarettes in the country. But, the price of a pack of cigarette is significantly low if compared 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 increased.