Govt plans to remove Advance tax on tobacco in next budget

ISLAMABAD: The government plans to remove the Advance tax on tobacco in the upcoming Federal Budget 2019 – 2020. The Advance tax of Rs300 per kg is applicable only on the tobacco that enters the Green Leaf Threshing (GLT) plant. All manufacturers who purchase tobacco from farmers must process tobacco through GLT before it can be used for manufacturing of cigarettes.

According to sources, purpose of this tax is to document the purchase of tobacco by manufacturers of cigarettes and other tobacco products, hence it is adjustable and not an additional burden on the manufacturers.

Tax evasion in tobacco sector initiates at the point when the tobacco is purchased by the manufacturers and middle men etc. In the past, the local cigarette manufacturing companies purchased tobacco directly and through middle men. More tobacco was purchased by them; however, less was reported to the Pakistan Tobacco Board (PTB). The same under reported figure was used when Federal Excise Duty (FED) was due to be paid on the manufactured cigarettes, thereby paying lesser duty than the actual owed to the government of Pakistan.

According to officials, the government introduced Rs300 per kg tax on tobacco to counter tax evasion and ensure proper reporting of tobacco purchased by the manufacturers. As soon as the manufacturer’s tobacco enters the GLT for further processing into usable tobacco, the manufacturer is bound to pay a tax of Rs300 per kg to the Federal Board of Revenue. This tax is refundable/adjustable and does not add any additional burden on the manufacturer, however, it notifies FBR of the quantities that have been purchased by the manufacturer, hence, assertion of FED on manufactured cigarettes are accurate and do not allow for tax evasion.

Recently farmers have been seen protesting on this tax with the point of view that they are being burdened with this tax and hence require that advance tax be removed with immediate effect. It is pertinent to mention here that advance tax is applicable only on the purchasers of tobacco whether middlemen or manufacturers, who use the tobacco for further purposes and send the tobacco for further processing through GLT. Therefore, it is not applicable on the farmers, whose responsibility ends once the tobacco is sold to manufacturers.

Some quarters say that these tobacco farmers are being used just to create noise by the non-tax paying local cigarette manufacturers as Advance tax has been introduced as means to curb tax evasion from manufacturers who under-report their tobacco purchases. This eventually leads to increased smoking in youth as local manufacturers who profit unlawfully through evading taxes are then able to sell their cigarettes at prices below minimum price prescribed by the government of Pakistan which is Rs47.39 per packet.

The government’s decision to remove this tax may facilitate the rise in illicit trade as it will once again give these local manufacturers the opportunity to hide their actual tobacco purchases and channel the unlawfully gained revenues from this evasion into marketing and fiscal violations that help initiate smoking in youth and discourage cessation. Advance tax of Rs300 per kg on tobacco should not be discontinued instead efforts need to be made to ensure that it is enforced rather strictly on the entire cigarettes manufacturing sector.