The single biggest challenge that the government's revenue base from cigarettes facing is the erosion of its volume as a result of rapid switching and down-trading to cheaper tax-evading brands that are easily and openly available in the market. Industry sources revealed that the tax-evading brands are openly sold at a low price of Rs 20/pack whereas according to the law the tax due is around Rs 36/pack. According to estimates, the tax-evading tobacco industry reportedly has a market share of more than 30 percent but only contributes 1.5 percent of the total revenue from the cigarette sector.
If the sale of tax-evading brands in the country is allowed to grow at the current pace, according to reliable projections, the government of Pakistan will suffer revenue loss of up to US $0.5 billion per annum. Therefore while higher prices may affect the legitimate industry volume, they cause a bigger problem when implemented without robust mechanisms to protect excise revenues.
However, the ground reality reveals that despite continued increase in Federal Excise Duty (FED) on tobacco, the Government's revenues have not shown a proportionate increase. The phenomenon is explained by a phenomenal 89 percent of the illicit cigarette market, comprised of local players, who refuse to pay due taxes according to a research by Nielsen. It is evident that excise increases in isolation can no longer be seen as a solution.
Sources said that the historic analysis of the excise duty versus revenue earned from cigarettes shows an increasingly widening gap. In the ongoing fiscal year (2015-2016) the FED on cigarettes increased by 31 percent but the overall revenues increased only by 9 percent. The difference is far too wide to be explained by minor discrepancies and the local duty evading segment appears to be eating away the legal tax paid cigarette volumes by blatantly violating the minimum tax regulations.
An effective measure is needed in the form of a visible pack differentiator, which may result in curbing the tax-evading segment. Keeping in mind previous efforts of the law enforcement agencies against smuggled cigarettes, it has been observed that where they could easily distinguish between a local and smuggled pack, enforcement of the law against smuggled goods was actively pursued. The same needs to be done with locally produced tax evading cigarette packets. A fiscal mark such as tax stamps is needed to differentiate between the tax paid and tax evaded cigarettes. The tax stamp option, with enabling legislation for severe penalties would help in bringing accountability across the Supply Chain. This in turn will help towards effectively pursuing enforcement measures against the tax evaded cigarettes.
While implementing tax stamps, due diligence must be followed to ensure successful implementation of the project. This includes clear and visible affixation of tax stamps on cigarette packs. Once tax stamps have been affixed a clearly defined reconciliation process must be put in place to allow for traceability of product. Building in mechanisms for strong accountability across the entire industry supply chain will ensure that all links of chain are well-aligned. Incorporation of carefully balanced, viable and effective features on tax stamps should be ensured to safeguard against counterfeiting. Finally transparent and open consultations with the industry and all relevant stakeholders will ensure that the mechanism is designed to succeed.
Within the country, Pakistan Security Printing Corporation (PSPC) already has the sole authority to print revenue stamps and tobacco excise labels under the Supply and Distribution of Stamp Rules, 1954. Being the country's currency printing manufacturer, they have existing reliability, together with necessary infrastructural ability and experience in anti-counterfeiting measures.
To set further context around the urgency driven by the growth of tax-evading businesses in recent years, it must be realised that excise duties on tax-paid brands have increased by more than 60 percent in the last 3 years leading to prices of key tax-paid brands increasing by more than 60 percent. This has led to the volume of the tax-paying brands going down, taking with it the government's revenue base. If swift legislative action is taken on the matter of tax stamps pairing it with the appointment of the corporation, valuable tax money in billions of dollars can be saved, they said.
As a next step, the government should look at inclusion of all sources of tobacco in this practice, including sales of gutka, bidi, sheesha, etc. Agreements requiring stamp application or the provinces' decision to apply stamps strategically within the distribution chain will alleviate concerns about tax losses from provincial sales, because it encourages prepayment of taxes, and will aid in enforcement of excise tax payment by establishing clear procedures and tax rates for products sold all across the country, they added.
Comments
Comments are closed.