PTC concerned over increase in FED without rise in threshold price

ISLAMABAD: Pakistan Tobacco Company has written to Prime Minister Shehbaz Sharif for registering their concerns over an unprecedented increase in Federal Excise Duty (FED) but not increasing retail price threshold proportionally, creating severe anomalies that will ultimately benefit illicit cigarettes brands by making smoking affordable.

In a letter to PM Shehbaz Sharif on Tuesday, the Chief Executive Officer (CEO) PTC said “historically, the Retail Price Threshold (RPT) used to move in line with the increase in Tier-1 FED but this time there is a deviation from the past precedent and not increasing the RPT systematically will have multiple negative implications”

The tobacco sector also expressed its serious objections over creating a “dead zone” whereby no new brand ranging from Rs 181 to Rs 330 per pack could be launched under the newly placed mechanism by the government, creating another anomaly for the formal sector.

To understand tobacco taxation in Pakistan, there is a need to understand the structure of applicable FED. There are two tiers of excise, the first is Tier I, which is applied to expensive cigarettes.

Through the recently approved mini-budget, this has been increased to Rs. 16,500 from Rs. 6,500 per thousand cigarette sticks which translates to Rs. 330 per pack FED which 154% increase.

The second is Tier II, which is applied to the Value for Money cigarettes. This Tier II has been increased to Rs. 5,050 from Rs. 2,050 per thousand cigarette sticks which translates to Rs. 101 per pack FED, an increase of 146%. In addition to this, the law prescribes a Retail Price Threshold that sits between the Tier 1 and Tier II FED rates.

This Threshold has increased by only 35%, from 6,660 per thousand cigarette sticks to Rs. 9,000 per thousand cigarette sticks, the CEO PTC said. There is also a Minimum Legal Price (MLP) restriction which determines that brands cannot sell below a certain price i.e. price floor. Under the current tax regime, the minimum price per packet of cigarettes has been mandated as per Section 3, First Schedule of Federal Excise Act 2005 which states that: “Minimum price. – No brand shall be priced and sold at a retail price (excluding sales tax) lower than 45 percent (now sixty percent) of the retail price under column (2) against serial number 9 of Table-I of the First Schedule to this Act.”

The increase in excise rates without a corresponding increase in the retail price threshold is unprecedented and has created serious anomalies that cannot be addressed through the existing restrictions in the Federal Excise Act 2005.

The FED rates are to increase by 154% on Tier I and 146% on Tier II, whereas the increase in threshold is only 35% with a negligible increase in the price floor of cigarettes, the letter asked the PM.

He said the FBR is making tier-1 and tier-2 cigarettes much more expensive but not really increasing the minimum price of a pack in the country. Why is this so? The retail price threshold should increase in line with the increase in Tier 1 rates so that the minimum legal price in the country comes up and criticism that Pakistan has the lowest-priced cigarettes, stops.

The retail price threshold that has increased recently is not sufficient to increase the Minimum Legal Price. Not only this but increasing the threshold will also ensure that prices are moving in an upward trend.

It is perceived that Pakistan has one of the lowest weighted average cigarette prices in the world. This is because almost half of the market is illegal and sells below the minimum price and tax applicable per packet of cigarettes.

As corroborated by multiple world-renowned research companies, more than 200 local illicit cigarette brands sell in Pakistan well below the mandated minimum price (PKR 108 excluding sales tax) which includes a minimum FED of PKR 101 per pack of cigarettes.

Duty and tax evasion by the local illicit cigarette industry have been threatening the operating environment for legitimate players and depriving and robbing the country of billions of rupees annually.

Globally, it has been witnessed that a price floor is introduced to ensure the lowest price of a packet of cigarettes in the market and to gradually keep increasing this floor.In Pakistan, the Minimum Legal Price is linked to the Retail Price Threshold which is set at 60% of the threshold.

Despite increasing the rate from 45% to 60% of the Retail Price Threshold, the minimum price has increased by only 80%. This is because the threshold has only increased by 35%, from 6,660 to 9,000 per thousand sticks. Resultantly the increase in minimum price increase is very little, encouraging low-priced cigarettes in the country, he concluded.