PTC cautions its sales will be impacted, if govt restores two-tier tax system

According to the formal sector, the creation of the third-tier helped to dent illicit cigarette trade from 41.2 percent to 33.3 percent in a span of one year


ISLAMABAD: As the chances of old-two tier tax system being restored for the tobacco industry looming, Pakistan Tobacco Company (PTC) has cautioned any such move could greatly dent its business.

The previous PML-N government had decreased federal excise duty (FED) by creating a third-tier for tax collection which allowed two multinational cigarette entities to reap a bonanza in last financial year, reports Express Tribune.

The sector’s largest player profit after tax more than doubled to Rs12.9 billion in FY18 from Rs6 billion in FY17.

While talking to the media, PTC Corporate Finance Head Mohammad Waqas Bhatti said if the government withdraws the third-tier and raises the FED steeply, the manufacturing sector sales and finance would be greatly impacted.

The finance ministry will recommend the change in tax systems for the tobacco sector amongst the recommendations which the finance ministry is expected to present before the federal cabinet.

The government’s FED revenues were more or less unchanged despite the major rise in profits of cigarette manufacturers.

The previous PML-N government in May 2017 had created the third-tier for FED collection from cigarette manufacturers which it said would increase revenues by an additional Rs50 billion.

However, it was felt this move was undertaken to favour two multinational companies at the cost of the public exchequer.

Ironically, the government’s revenue generation from FED declined from Rs92 billion in FY16 to Rs67.2 billion in FY18, a massive fall of 40 percent or Rs25 billion.

Also, the creation of this third-tier contributed to a rise of only Rs1 billion in FED collection during FY18 against FY17, which was lower than normal growth.

However, the PTC official stated the third-tier introduction wasn’t a tactical move but a strategic decision.

He added, in a duration of three years FED collection would rise from Rs67 billion to over Rs100 billion.

The withdrawal of the third-tier by the government would dent 80 percent of PTC’s sales volume.

Mr Bhatti said its company’s two famous cigarette brands fell in the lowest slab which contributed to 80 percent of its sales volumes.

The company holds the lion share of the tobacco market in Pakistan, with a 70 percent market share.

The first tier caters to expensive cigarette brands, which has the highest tax rates, followed by the second and third tiers, which entice low tax rates.

According to the formal sector, the creation of the third-tier helped to dent illicit cigarette trade from 41.2 percent to 33.3 percent in a span of one year.

But this claim of the formal sector couldn’t be authenticated independently. The tobacco industry maintains cigarette consumption has registered a fall in the last six years, declining from 81.7 billion sticks in 2012 to 79.8 billion sticks presently.

It added the government had raised the tax burden on the sector by 87 percent from 2013 to 2017 before being decreased by creation of the third slab.