Federal Excise Duty on tobacco: FBR facing political pressure to abolish Rs300 per kg levy

ISLAMABAD: The FBR has been facing pressures from political elites to abolish adjustable Federal Excise Duty (FED) of Rs300 per kg on the processing of green tobacco at Green Leaf Threshing Plants (GLT).

National Assembly Speaker Asad Qaiser on Wednesday convened meeting to discuss proposal for giving relief to tobacco growers in the budget 2019-20 in which parliamentarians belonging to KP and couple of provincial ministers also participated. The FBR high-ups were asked to abolish the FED of Rs300 per kg on tobacco growers by claiming that it is hurting them negatively.

However, the FBR high-ups argued that the production of tobacco growers stood at 70 million tons and the formal sector got almost 43 million tonnes, so where the remaining production went. According to their estimates that the FBR could provide refunds if someone come up with sharing details. However, the meeting decided that another meeting would be held next week on coming Tuesday to take decision on this matter. When contacted FBR’s spokesman on Wednesday, he said that the discussions were underway and the decision on abolishing of adjustable FED of Rs300 per kg on tobacco growers would be taken next week.

The tax evasion is one of the major challenges for the FBR. In fact, there exist two types of cigarette industry in the country and certain portion holds by the illicit cigarettes. After announcement of the budget 2019-20, the minimum tax on a pack of cigarette is Rs42.11 (FED Rs33.00 + GST Rs9.11) per pack of 20 cigarettes with a minimum retail price on Rs62.75 but the tax evading manufacturers sell their brands for Rs30 and below, which is even less than the minimum tax applicable on a pack of cigarettes.

Tobacco is a highly regulated crop in Pakistan through Pakistan Tobacco Board (PTB) and laws exist at every step of the supply chain. There are also a specific set of laws that protect the interests of farmers.

According to PTB regulations, only manufacturers, exporter and dealers registered with PTB can purchase tobacco from the farmers against a demand notified to PTB at the start of the season. All the purchases must be documented and notified to PTB and payments to the farmers made through bank vouchers.

Similarly, under PTB Ordinance 1968 Section 30, surplus tobacco has to be purchased by manufacturers proportionate to their original demand declared to PTB. This ensures that despite a surplus crop, farmer crop sales are guaranteed, and it is the responsibility of manufacturers to purchase all surplus crop. Furthermore, through another law known as MLO-487, companies cannot pay less than the last year’s weighted average price since the next year’s tobacco price must be more than previous year’s weighted average price. This ensures farmers a guaranteed higher price, year on year.

To avoid documentation of the leaf purchased for manufacturing cigarettes, the illicit manufacturers only declare a miniscule portion of their actual demand to PTB and buy bulk of their requirements outside the ambit of PTB through their front men and dealers either on cash or credit.

In the interim budget in September 2018, in order to document the tobacco leaf purchases by cigarette manufacturers, FBR introduced a provision to introduce an adjustable FED of Rs300 per KG on the processing of green tobacco at Green Leaf Threshing Plants (GLT). In Pakistan, there are only around 10 GLT plants and is most effective point in the supply chain to check tax evasion. There is an exemption for the tobacco exporters.

The manufacturers or exporters purchase green leaf from the farmers. GLT processing of green leaf purchased from the farmers is a necessary step prior to using the tobacco for manufacture of cigarettes or export of tobacco. After the introduction of the above-mentioned withholding provision, it has become very difficult for the illicit manufacturers to avoid the documentation of their actual tobacco purchases.

Those who have made fortunes through tobacco tax evasion, are exerting immense pressure on the FBR, through their political clout to undo this provision by portraying it as a tax on the tobacco farmers.