ISLAMABAD: The Senate Special Committee on the causes of declining tax revenues from the tobacco sector is scheduled to be held today (Wednesday).
Sources in the cigarette industry informed Pakistan Today that the Senate panel is likely to finalise its recommendations very soon and the present government is also expected to include these recommendations in its ‘mini-budget’ reportedly to be announced next Friday.
They said that a report on the decline of tax collection from the tobacco sector will also be tabled in the meeting as the introduction of a third-tier tax structure has so far caused heavy loss to local cigarette manufacturing industry, and has also increased the smoking ratio across the country.
The government is likely to end the third-tier tax structure on cigarette prices introduced in the Pakistan Muslim League Nawaz (PMLN) government, said sources.
Approximately 160,000 deaths occur due to smoking in Pakistan on an annual basis, while a loss of almost Rs130 billion is caused to the national exchequer. Already, the Public Accounts Committee (PAC) has taken a serious notice of the matter and initiated investigations to figure out the reasons behind this.
Furthermore, the incumbent finance minister Asad Umar has already given his verdict against the third tier structure on cigarette prices in the National Assembly Standing Committee of Finance.
The PMLN government had amended the tax structure for collecting Federal Excise Duty (FED) on cigarettes vide S.R.O. 407(I)/2017 dated 29 May, 2017, issued by the Federal Board of Revenue, which was later included in the Finance Act, 2017, by amending the relevant provisions of the Federal Excise Act, 2005.
There have historically been two slabs/tiers of FED on cigarettes produced in Pakistan. Since at least 2013, there had been an upper slab (upper tier) and a lower slab (lower tier). The rate of FED attracted by cigarettes – i.e. which slab to apply – was determined by the “retail price per pack”. The rationale for amending the FED tax structure was primarily based on an increase in the sale of illicit and non-duty paid cigarettes with estimates that up to 40 per cent market share was with the illicit sector with non-duty paid cigarettes the largest component of such illicit trade.
This data was gathered by two companies – Nielsen Pakistan and Oxford Economics.
Both these companies are “for-profit” organisations and their research were commissioned by Pakistan Tobacco Company (or its parent company, British American Tobacco) and Philip Morris International.
Both the multinationals give specific terms of references to Nielsen and Oxford Economics to carry out their research with a very limited scope. It is of huge concern that the government policy is based on research carried out by a company which is commissioned by another company. The FBR or the government of Pakistan has not conducted any independent research through the Pakistan Bureau of Statistics before amending the FED tax structure.
In reality, the average illicit market share of cigarettes is 9 per cent in Pakistan, as indicated in a recent study conducted by Pakistan National Heart Association (PANAH), a world-renowned health foundation.
As a result, the government introduced a three-tier FED tax structure for enhancing the revenue where FED was decreased from Rs33.4 to Rs16.0 for cigarettes with an on-pack retail price below Rs58.5.
The sources also said that these amendments have apparently distorted the tax structure for collecting Federal Excise Duty (FED) on cigarettes. The common perception in the market is that it was done on the recommendations of multinational tobacco companies, without taking into consideration the legitimate concerns of the small cigarette manufacturers of Pakistan.
The target fixed for the collection of revenue by FBR in terms of Federal Excise Duty and Sales Tax from MNCs was Rs126 billion for FY 2017-18, in return for aforesaid favourable tax policies. However, the revenue collected by FBR for FY 2017-18 was around Rs90 billion, falling short by a huge margin of Rs36 billion.
It is worth mentioning that MNCs in cigarette industry has only managed to increase taxes by 14 per cent in 2017-2018 but their net turnover & net profit heavily increased by 62 per cent and 218 per cent respectively.
A historical fact and a trend which is seen throughout the world including the US, UK and Europe, which can only be reduced from the marketplace by effective enforcement mechanism instead of playing with the tax structure of collecting FED on cigarettes.
In practice, these actions made by the Government has ostensibly resulted in an increased market share of the multinational companies vis-à-vis closure of the small cigarette manufacturers and also greatly reduced the revenue of national exchequer.