Report of Senate’s special body on tobacco taxation flawed

LAHORE: The report of Senate’s Special Committee on Tobacco Taxation presented last month in the House raised serious questions by the experts and government department officials on its credibility and authenticity.

They pointed out number of flaws in the report as it solely held the Federal Board of Revenue (FBR) responsible for weak enforcement mechanism and decline in tax revenue collection besides questioned new regulations introduced by the government in financial year 2017-18 to expand the tax base and increase the tax revenue.

However, the fact is that FBR is not the only agency to keep a check on the illicit cigarette trade in Pakistan as such issues are also dealt with by the provincial enforcement agencies as well as Competition Commission of Pakistan (CCP). As per laws, Ministry of National Health Services, Regulations and Coordination, provincial health ministries, district administrations all have powers to check the illicit cigarette trade.

Thus FBR is not the only government department that can be blamed for blackmarketing of cigarettes, said an FBR official. Further, the FBR only proposed a policy and legislators passed it in the National Assembly and Senate while held the FBR responsible in case of failure, he added.

A major flaw in the findings of the Committee mentioned in Point 17, Page 7 states that the “The Committee after listening to the viewpoint of all the stakeholders came to the conclusion that the major cause of decline in tax collection in the year 2016 – 17 in tobacco sector was primarily due to the introduction of the 3rd tier which resulted in lower taxes on cigarettes”.

The Committee failed to realise that 3rd tier was introduced in the year 2017 for the federal budget 2017-18 and in the year 2016-17, the excise system was 2-tier, hence, the decline in tax collection in the year 2016-17 can only be attributed to the 2-tier excise system. The Senate committee report further said the FBR could not explain properly the reasons of 42 percent decline in federal excise duty (FED). However, it has been categorically mentioned in the report that the FBR has stated that the introduction of the third tier in the Finance Bill 2017 helped the legitimate cigarette manufacturers in regaining their lost volumes, which led to an increase in the revenues of the FBR and not otherwise.

According to report in 2015-16 total FED collection was Rs 90.435 billion which declined in 2016-17 to Rs66.131 billion. After a shortfall of Rs24.304 billion, the then government introduced third tier excise taxation structure for the tobacco industry. Tax structure of third tier in Financial Bill 2017 was implemented for the fiscal year 2017-18. Interestingly, the Committee’s report stated that third tier was responsible for revenue shortfall. However, at the same time report also stated that in 2017-18 tax collected from tobacco sector was Rs87.529 billion which in actual marked increase in revenue as compared to Rs66.131 billion of previous fiscal year of 2016-17. Thus, the report impression of decline in revenue collection after introduction of third tier structure on cigarettes is misleading.

Report also stated that in 2015-16 two major multinational companies contributed Rs89.255 billion and local manufacturers contributed Rs1.487 billion out of Rs90.435 billion while in 2016-17 two multinational companies contributed Rs66.131 billion and local manufacturers contributed only Rs1.478 billion out of Rs66.131 billion, thereby acknowledging the presence of illicit cigarette trade in Pakistan that holds 40 percent of the market share yet contributes only 2 percent of the total tobacco sector contribution to the national exchequer. The report also ignored the viewpoint of two biggest taxpaying cigarettes manufacturing companies that the introduction of the third tier in FED has helped them to regain their lost share from the illegal sector. Moreover, the report also ignored the findings of the FBR that the introduction of the third tier in FED helped the duty paying industries in regaining their lost volumes of the sale which had negative impact on illicit volumes and thus positive impact on government revenue collection also. According to a FBR official, the Committee noted with concern that there was complete lack of coordination among the stakeholders as FBR has never consulted them while formulating tax policy. During the budget preparation exercise, the FBR is only one revenue collecting agency which is responsible for submitting the proposals for the federal cabinet after they are duly vetted by the finance ministry. Federal cabinet and finance ministry are the approving authorities and federal cabinet can turn down any proposal if not deemed fit during this process.

A wrong impression has been created in the report that the FBR seemed to be an approving authority for finalisation of the tax policy. The FBR is not the approving authority for any tax policy but the approval of National Assembly is required after clearance from National Assembly’s Standing Committee on Finance. If FBR has not accepted any proposal of health ministry, any of the approving forums of tax policy can be channelised for rejecting FBR’s proposals, he added.

According to the industry officials, the third tier was announced in federal budget (2017-18) to increase revenue from the legal players and decrease illicit trade of non-duty paid cigarettes. The third tier was available to both multinational cigarette companies and domestic manufacturers as the primary objective of the government was to bring non-compliant manufacturers in the tax net. Historically, the industry data indicates that aggressive excise-led price increases create consumer affordability issues and accelerates down trading by the consumer from tax paid to duty-evaded cigarettes. Therefore, it is imperative for the government authorities to drive a balanced and evidence based fiscal agenda along with effective enforcement measures to curtail the sale of duty-evaded cigarettes.

Chairperson of Senate Special Committee on Tobacco senator Kusloom Parveen while talking to The News said politicians were not responsible for any policy-making as institutions make policies. “A policy wing works in the FBR which makes policies so the FBR was responsible for any failure,” she added. However, when questioned that why legislators turn down such policies when they are presented in the National Assembly and Senate before making them law, she insisted that legislators and politicians have nothing to do with policy-making. She said the multinational companies working in Pakistan have to pay taxes as they earned here. To a question, why local manufacturers were not brought in the tax net, she said they were small players having no comparison with MNCs. Further on health regulations violations by the local cigarettes producers, she said the bigger players’ production capacity was huge and they have to pay taxes.