KARACHI: On a report of the Public Accounts Committee (PAC) submitted on May 23, the National Accountability Bureau (NAB) has initiated an investigation against the cigarette manufacturing companies regarding rising tax benefits.
The cigarettes manufacturing companies in Pakistan have started taking tax benefits after the introduction of a third tier in the tax structure in May 2017, and major industry players shifted their famous brands to the lowest tax slab and sold cigarettes with a 50 per cent reduction in the federal excise duty, which enhanced their sales, but government revenues plunged, according to the audit report.
The report also alleges that two main multinational cigarette manufacturing companies obtained benefits of over Rs33 billion through the change in the tax slab structure.
However, industry sources claimed that the tax revenue received by the government from cigarettes manufacturers enhanced to Rs88.54 billion in the fiscal year 2017-18 compared to Rs74.10 billion in the same period last year. The government revenue has enhanced during last one year instead of declining as claimed by the PAC.
One of the sources said, “How can a famous brand come at the lowest tax slab and these companies can save up to 50 per cent in taxes.”
The source said that the FBR will cooperate with the companies and NAB regarding the increase in tax revenues from the tobacco sector since the implementation of the third-tier tax slab on cigarettes. However, the FBR is also ready to share any required documents and facts to support the investigation.
The FBR’s strategy of showing consistency in tobacco taxation policy with the third-tier slab and in expediting the crackdown on illicit tobacco trade has been regarded as instrumental in making positive contributions to the national economy.
The FBR had introduced a third-tier tax slab on the tobacco sector in the financial year 2017-18 in a bid to scale up revenues from the tobacco sector. Alongside, the FBR instructed its field formations across the country to show zero tolerance towards illicit cigarette trade.
In the financial year 2016-17, a massive decline in revenues from the tobacco sector was witnessed when the Federal Excise Duty (FED) on tobacco was levied two-tier basis only and has been at the highest for tier-two cigarettes at Rs1,534 per thousand cigarettes with effect from June 4, 2016, and Rs1,649 per thousand cigarettes with effect from December 1, 2016, the source from the industry claimed.
The introduction of the third tier of FED at Rs800 per thousand cigarettes with effect from May 29 2017 has, in fact, helped further declining the tax revenues from teh tobacco sector, evident from the collection of FED and sales tax at Rs87,529 million during the financial year 2017-18, compared with Rs83,764 million collected in the financial year 2016-17.
Officials in the FBR said that the main reason for the decline in government revenue was higher prices of cigarettes. “Tier-two category is mainly consumed by lower and middle-income groups”, he added.
The price levels of around 72 per 20 cigarettes was increased in the tier-two structure. Whereas, cigarettes marketed by the non-duty paying illegitimate cigarette industry were available in the market in the price range of Rs25 to Rs30 per the 20 cigarette packet.
This significant price differential, particularly in a low-income group in a country like Pakistan, led to capture a significant market share of cigarettes by non-duty paying cigarette industry particularly during the year 2016-17 and this seriously dented the government’s revenue as well, the industry source said.
At the end of 2016, the illegal cigarette trade in Pakistan had climbed to 40 per cent of the total market size, causing an estimated annual loss of over Rs130 billion to the national exchequer in five years. apart from the two multinational cigarette manufacturing companies, the industry is dominated by tax evading manufacturers based in Mardan and Azad Jammu and Kashmir (AJ&K).
These illicit manufacturers, who under-declare production to evade taxes and sell their brands below the minimum price set by the government, are responsible for more than 85 per cent of illicit trade in Pakistan.
During the period 2015-16, 54,177 million sticks were sold and during the period 2016-17, 29,278 million sticks were sold. To help legitimise the cigarette industry and regain its volume lost to the tax-evading sector and boost government revenues, the third-tier of FED was introduced through the Finance Act, 2017 prescribing FED at Rs800 per thousand cigarettes which has enabled the duty-paying cigarette companies to sell their lower brands at around Rs48 per 20 cigarettes packet – still significantly higher than cigarettes marketed by the non-duty paying segment of the cigarette industry.
The introduction of the third-tier has helped the government recoup its lost revenues indicated from the fact that during the period of 2017-18, 57,955 million sticks were sold and FED and sales tax revenue was Rs87,529 million, it added.
