FBR expected to collect Rs200bn from tobacco sector

ISLAMABAD: After a recent increase in taxation measures, targeting locally manufactured cigarettes, the Federal Board of Revenue (FBR) is figured to collect revenues worth Rs200 billion from the tobacco sector during fiscal year 2022-23, The News has learnt.

The FBR had rolled up Rs149.3 billion revenues from the sector under review in the last financial year ended on June 30, 2022.

On eve of budget 2022-23, the FBR was estimated to pull in Rs165 billion after a hike in the Federal Excise Duty (FED) but with the recent increase in the FED rates through mini-budget, it was estimated that additional Rs36 billion would be brought in under this head so the total collection would go up to Rs200 billion.

Industry stakeholders argued it would not be that easy for the tax appartus to generate revenues to the tune of Rs200 billion from the tobacco sector because increased prices of cigarettes were highly likely to shift customers to cheap illicit brands.

According to a research report by the world-renowned Institut Publique de Sondage d'Opinion Secteur (IPSOS), the local illicit cigarette trade in Pakistan causes nearly Rs80 billion revenue losses to the government every year.

This is predominantly done through under-declaration of volumes at each link of the supply chain and through pricing below the government-mandated minimum per packet price of cigarettes.

In the recent federal budget for FY2023 and subsequent Presidential Ordinance to introduce the mini-budget announced in August 2022, excise rates on cigarettes have been raised by more than 24 percent.

The Tier-1 rates (premium category cigarettes) have increased from Rs5,200/thousand sticks to Rs5,900 and later to Rs6,500. Tier-2 rates (lower category) increased from Rs1,650/thousand sticks to Rs1,850 and later to Rs2,050.

Generally higher taxes are imposed on cigarettes around the world to reduce consumption. This would be also true for cigarettes in Pakistan, had there not been a large, 37 percent, illicit segment of the market.

History stands witness that tax tightening only increased consumption of cheap illicit cigarettes as the legitimate industry jacks up the prices of its brands after tax hikes, whereas manufacturers operating in the black market hardly move their prices upwards.

The Federal Excise Act, 2005, mandates a minimum price of Rs70.13 for a pack of cigarettes, which includes a minimum per pack tax of Rs51.2. As per multiple sources there are close to 200 local illicit cigarette brands selling in Pakistan, much below the government mandated minimum per packet price. As per research conducted by the Institute of Public Opinion Research (IPOR), the lowest priced illicit cigarette brand generally found in a retail shop is sold at Rs15/packet. As per the law, any person found selling cigarettes below the minimum legal price is liable to a Rs20,000 fine. To date, no person has been fined.

It is shocking to see that a segment that holds 37 percent of the total market share contributes only 2 percent in total tobacco tax collection.

To curb this tax evasion and to check the illicit brands available in the market, the FBR introduced a measure through Sales Tax General Order No. 7 of 2021, making it mandatory for all cigarette manufacturers to obtain brand specific licences.

It is unfortunate to note that as per available records, only 16 brands of 2 companies that contribute 98 percent to the total tobacco taxes have applied for licences, while all other illicit brands, readily available in the market, have not even bothered to apply. The success of this measure is particularly important since new illicit cigarette brands enter the market every few weeks, capitalising on the low prices due to tax evasion. The authorities, including the FBR, are unaware of all the new entrants and therefore effective licensing of each brand becomes imperative to ensure proper tax collection against the actual sales of illicit manufacturers.

A much-awaited Track and Trace System would help plug the leakages caused by the illicit tobacco segment. Following its implementation cigarettes sold without the tax stamps affixed on the packs will be illegal and manufacturers will face outright confiscation and destruction of such stock and recovery of applicable taxes along with any penalties as accorded in the Federal Excise Act, 2005.

For the dividends from the Track and Trace System to be realised, it is important to have it implemented across the board with consistent enforcement at retail and manufacturing levels. Sadly, to date, only 3 out of 45 manufacturers have signed a Tri-Partite Agreement with the Licensee and the FBR.

The smuggled cigarettes are sold openly in the country and are widely available. In addition to tax evasion, those packets do not comply with the Ministry of National Health Services, Regulations & Coordination (MoNHSR&C) laws, including printing a health warning covering 60 percent of the pack.