Govt takes measure to curb illegal import of cigarettes

ISLAMABAD: The complex taxation system on cigarettes introduced by the government through the Finance Bill 2017, which allowed the legal companies to reduce the prices apparently to curb illicit sale of smuggled cigarettes has attracted the attention of the Peshawar High Court, which has suspended the part of the Money Bill that created a new tier for cigarettes brands for imposition of Federal Excise Duty.

Reportedly there are over 25 million tobacco consumers in Pakistan including 10 million cigarette smokers, resulting in deaths of above 100,000 people every year due to tobacco consumption and around 1,200 teenager start smoking every day.

Prior to the latest budget, there were two tiers for cigarettes brands and those having retail price of Rs88 or more for a pack of twenty cigarettes would be imposed FED of Rs74.8 per pack plus sales tax thus fell in Tier 1 while those having retail price of less than would be taxed Rs32.98 for a packet of 20 cigarettes plus the sales tax.

In the budget 2017-18, the government introduced a new tier. The documents show that now the rate of FED on the first tier of cigarettes is Rs3,705 per 1,000 cigarettes and Rs1,649 per 1,000 cigarettes in the 2nd tier. While for third tier an FED of Rs800 is payable per thousand cigarettes, i.e. Rs16 per pack of twenty cigarettes with sales tax at approximately Rs6.98 per pack to tackle the illicit, non-duty-paid cigarettes.

Senior Lawyer Babar Yousafzai who has succeeded in getting a part of the finance Bill 2017 suspended by the PHC, explained that it was unfortunate that the government played in the hands of the multinational tobacco companies to introduce complicated tax structures which made it difficult for common people to understand the implications.

In Pakistan, cigarette excise duties have traditionally been applied in two tiers, the lawyer said, adding: “The first tier was for the cigarettes which were expensive, usually consumed by the upper middle class and above; while the second tier was applied on cigarettes which were consumed by the middle class and below and that the tax tier was based on the price of the cigarette, such that those cigarettes with on pack price was more than Rs88, the FED applied was Rs74 per pack, falling in Tier 1. For those cigarettes with on pack price less than Rs88, the tax applied was Rs32.8, thus falling in Tier 2.”

Babar said that in the recent changes in the FEA 2005, the Ministry of Finance introduce a third tier of taxation which would introduce a decreased tax on its products, where tax was decreased to Rs16 for cigarettes with on-pack retail price below Rs58.5. This was despite the Ministry of National Health Service proposing increase on all taxes and rejecting the proposal of a third tier. He held that the cigarettes companies were allowed to shift between the tiers whereas in the previous Act, they were not allowed to do so and because of this relaxation by government, the prices of cigarettes have decreased drastically.

The spokesman of FBR, Dr Muhammad Iqbal while talking to the News said that despite increasing the duties on cigarettes, the tobacco consumption was not decreasing, and instead smuggled and non-registered cigarettes brands had captured the market. The revenues were falling drastically without any positive development in reduction of consumption, the spokesman added.

He maintained that in one year, the tax collection on cigarettes dropped from Rs114 billion to Rs83 billion, therefore it was decided to reduce the cigarette prices of legitimate companies so that revenues may not fall and this step has yielded results.

The Federal Board of Revenue in its detailed briefing to a Senate committee had maintained: “It is submitted that third tier of Federal Excise Duty on cigarettes was also applicable till it was withdrawn wide Finance Act 2013 and at the time of withdrawal rate of FED for third tier was Rs7.02 per 10 cigarettes i.e. Rs702 per thousand cigarettes. Introduction of third tier would only help legitimate cigarette industry re-capture market share that had gone to low quality, non-duly paid cigarettes and ensure payment of duties and taxes by legitimate industry. It is further submitted that Article 6 of Framework Convention on Tobacco Control dealing with taxation of tobacco provides as under: 'Without prejudice to the sovereign right of the Parties to determine and establish their taxation policies each party should take account of its national health objectives concerning tobacco control and adopt or maintain, as appropriate, measures which may include:

Implementing tax policies and, where appropriate price policies on tobacco products so as to contribute to the health objectives aimed at reducing tobacco consumption: and

Prohibiting or restricting a­s appropriate sales to and/or importations by international travelers of tax and duty-free tobacco products. Thus, FCTC recognizes rights of states Signatory to the convention to introduce their own taxation policies/ duty structures. As such introduction of third tier does not tantamount to violation of WHO's Framework Convention on Tobacco Control and was introduced to arrest sale of non-duty paid cigarettes.'

"It is pertinent to mention that introduction of third tier of Federal Excise Duty is expected to result in substantial increase in duties and taxes from cigarette industry which has gone down drastically from Rs114.202 billion In the year 2015-16 to Rs83.694 billion in 2016-17.

"Third tier of Federal Excise Duty has been introduced to arrest the increase in market share of illicit, non-duty paid cigarettes which had reached almost 30% of total cigarette market.

It is submitted that before introduction of third tier through Finance Act 2017. Thus the minimum incidence of Federal Excise Duty and sales tax alone on tier-1 cigarettes was Re92.99 whereas for tier-2 cigarettes it was Rs43.45. On the basis of this duty and tax structure lower brand of cigarettes falling under tier-2 category could be sold in the price range of Rs67 to Rs72 per 20 pack of cigarettes On the other hand non-duty paid illicit cigarettes were sold in the market at per pack of around Rs30 which was even less than amount of FED and sales tax.

"To tackle the menace of illicit, non-duty paid cigarettes, a third tier has been introduced wide Finance Act 2017 whereunder FED payable is Rs800 per thousand cigarettes i.e. Rs16 per pack of 20 cigarettes with sales tax at approximately Rs6.98 per packet. This third tier has enabled legitimate cigarette industry to price their lowest brands at approximately Rs47 to Rs48 per pack of 20 cigarettes.”