KP cigarette industry shifts to AJK to avoid three-tier taxation

ISLAMABAD: After the imposition of three-tier taxation on cigarettes by the previous government, the major producers of cigarettes in Khyber Pakhtunkhwa (KP) have either halted production or shifted their businesses to Azad Kashmir. This has compelled officers at the Federal Board of Revenue (FBR) to inform their headquarters regarding the ailing condition of the manufacturing industry in KP. While in opposition, Finance Minister Asad Umar has been a vocal critic of the three-tier taxation of cigarettes by the Pakistan Muslim League-Nawaz (PML-N) administration. It is yet to be seen what measures he would take now that he is in government.

The PML-N government maintained the three-tier system of imposing Federal Excise Duty (FED) on cigarettes for the financial year 2018-19. It was introduced in 2017-18, much to be benefit of multinational companies. Local producers, on the other hand, were left in the lurch.

However, the FBR had adopted the stance that the three-tier tax system was introduced to reduce the consumption of smuggled and illicitly produced cigarettes, which enjoy a 40 percent share of the market.

In the budget, the government increased the levy on the lowest tier of cigarettes to Rs 0.96 a packet, raising total FED to Rs17 per pack of 20 cigarettes. According to budget documents, the FED per thousand cigarettes has been increased from Rs74 to Rs79 for Tier 1, from Rs33 to Rs34 for Tier 2, and from Rs16 to Rs17 for Tier 3.

The government did not adopt the suggestions of the finance committee of the Ministry of National Health Services, Regulations and Coordination, or those of tobacco control organizations which had advised an increase in taxes on tobacco products. The National Assembly Standing Committee on Finance had recommended the FBR to revert to two-tier taxation on cigarettes by putting domestic manufacturers in the lower slab and the multinationals in the higher one.

The Regional Tax Office Peshawar wrote a letter to the Member Inland Revenue of the FBR and explained the situation arising from the three-tier taxation of the local industry. It said the imposition of monitoring, under Section 40-B of the Sales Tax and Section 45 of the Federal Excise Act 2005, on all cigarette manufacturers of Mardan and Swabi region in 2017-18 had effectively curtailed the illicit tobacco trade. However,it also prompted some manufacturers, including top-five producer Imperial Cigarettes (Pvt) Ltd Swabi to relocate its business to Azad Jammu and Kashmir (AJK), adversely affecting the collection of FED from the sector.

“Introduction of the third slab brought about a paradigm shift in the structure of FED, thereby facilitating formal business in the sector. However, it reportedly generated a lot of unease for the local manufacturers who thought the new situation to be tilted towards the multinational companies, and not competitive for their businesses anymore," the Peshawar office advised.

Small manufacturers including Indus Tobacco, Royal Cigarettes and Maneri Tobacco have reduced or altogether halted production in KP and intimated the FBR accordingly. Khyber Tobacco Company Limited, which accounts for 54 percent of collected FED, slashed production in April 2018. It may not restore production at previous levels and has reportedly decided to shift the bulk of its business to AJK, following in the footsteps of Imperial Cigarettes (Pvt) Ltd, which now conducts most of its business under the name of Progressive Tobacco - without being subjected to the rigorous pattern of enforcement as it was in the domain of RTO Peshawar.

"The relocation of Khyber Tobacco Company Limited to AJK would adversely affect FED collection of the RTO, but would also encourage other cigarette manufacturers to follow suit. It is therefore requested that monitoring mechanism at all entry points to Pakistan from Azad Jammu & Kashmir be refurbished to check illicit cigarette trade,” the letter concludes.