PHC takes up FED on cigarettes case today

ISLAMABAD: Peshawar High Court today (Thursday) takes up the case of tricky system of Federal Excise Duty on cigarettes introduced in the budget last year which brought reduction in prices of tobacco products as opposed to the international conventions signed by the country.

The PHC, on last hearing, had suspended a part of Money Bill that created a new tier for cigarette brands for imposition of FED.

This new tax cut not only dismayed the anti-tobacco activists, but also the local manufacturers, as the multinationals have been allowed to make the most of the new tax cuts. The PHC is also hearing a contempt petition in the same case because suspension of complex FED has not been implemented despite the court’s clear ruling. Reportedly there are over 25 million tobacco consumers in Pakistan including 10 million cigarette smokers, resulting in death of above 100,000 people every year. Around 1,200 teenagers start smoking every day.

With the introduction of tax cuts on cigarettes, especially for the multinational companies, use of cigarettes is likely to be increased. Pakistan is a signatory to the World Health Organization’s Framework Convention on Tobacco Control 2004 where dozens of countries have joined hands to make it difficult for non-smokers to start smoking and one step was to introduce high taxes to make cigarettes out of reach of people, but the reverse happened in Pakistan during the current fiscal year.

Prior to the latest budget, there were two tiers for cigarette brands. In Tier 1, a pack of 20 cigarettes having retail price of Rs88 or more would get Rs74.8 FED, while in Tier 2 a pack of 20 cigarettes having retail price of less than Rs88 would be taxed Rs32.98 plus the sales tax. In the budget 2017-18, the government introduced a new tier. Documents show that now the rate of FED on the first tier of cigarettes is Rs3,705 per 1,000 cigarettes and Rs1649 per 1,000 cigarettes in the 2nd tier. For the third tier, an FED of Rs800 is payable per one 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 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 expensive cigarettes usually consumed by the upper middle class and above, while the second tier was applied on cigarettes consumed by the middle class and below and that the tax tier was based on the price of 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 pack price less than Rs88, the tax applied was Rs32.8, thus falling in Tier 2. Babar said in the recent changes in the FEA 2005, the Ministry of Finance introduced 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 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 said despite increasing the duties on cigarettes every year, tobacco consumption was not decreasing, and instead smuggled and non-registered cigarettes brands had captured the market. The revenues are falling drastically without any positive development in reduction of consumption, therefore this decision was taken, the spokesman said. Babar Yousafzai says if the third tier was introduced to snub smuggled cigarettes then why the government does not do the same for the other products which were also available on the market but were smuggled for instance medicines.

He maintained that the government was not willing to halt smuggling of cigarettes and even kiosks outside the FBR buildings were selling smuggled cigarettes. He said availability of smuggled cigarettes had been ensured by powerful people. He explained that in most cases, the government supervises the production of cigarettes of local industry but for multinational companies, it tried to make market share for them. Importantly, in May last year, prior to the budget, the multinational tobacco companies started reducing the price of a pack of 20 cigarettes as allegedly they were foretold about the upcoming tax cut.