Tax managers lose sight of major revenue source: duty on raw tobacco import not raised

The Federal Board of Revenue (FBR) and Revenue Advisory Council have ignored a major revenue generation measure to collect additional revenue by raising customs duty from existing minimum 5 percent to 30-35 percent on import of un-manufactured tobacco.
Tax experts told Business Recorder here on Saturday that the FBR has proposed to the Ministry of Finance to raise the rate of special excise duty, withholding tax from 4 to 5 percent at the import stage, withdrawal of capital value tax (CVT) exemption available on the immovable property and increase in rate of sales tax on power consumption by the commercial and industrial consumers. All the proposed measures have direct negative impact on the business and trade. It seemed that the government is not interested in taking these measures to generate revenue under current circumstances.
At the same time, the Revenue Advisory Council and FBR have started enforcement action against the cigarette industry to generate additional revenue to meet revenue shortfall of federal excise duty.
However, the imported unmanufactured tobacco has no other use except production of cigarettes. Instead of taking harsh taxation measures on the industrial units and manufacturers, the imposition of regulatory duty (RD) or additional customs duty on import of unmanufactured tobacco would discourage import of this 'non-essential' item used in the manufacture of cigarettes. Presently, the FBR is desperately looking for measures to increase revenue without increasing the cost of doing business of existing units. Interestingly, nobody from the Revenue Advisory Council or tax managers proposed to raise duty on the import of unmanufactured tobacco, which has no other use except manufacturing of cigarettes.
When contacted, an FBR official said that the FBR has estimated to collect an additional amount of Rs 2 billion from cigarette manufacturers during current fiscal year.
The incidence of price increase in different brands of cigarettes would be visible in collection of the excise duty from February 2010 onwards. Moreover, Anti-Evasion Cell of the FBR has extended scope of investigation for checking tax evasion by the cigarette manufactures located in the NWFP. Peshawar has been brought into ambit of investigation as it is a crucial area to check tax evasion in the cigarette sector, sources added.
Experts opined that a number of local cigarette manufacturers are engaged in import of huge quantities of unmanufactured tobacco, which, at present, is liable to the lowest slab, 5 percent, of customs duty. Taxation structure shows that the unmanufactured tobacco, falling under Pakistan Customs Tariff heading 2401.2000, is liable to 5 percent duty, 16 percent sales tax, and one percent special excise duty (SED). This minimum rate of duty has been applicable on the import of raw tobacco for the last many years.
The imposition of higher rate of customs duty on the import of unmanufactured tobacco would not only raise customs duty collection but would also check the consumption of cigarettes in the country.
Globally, highest rate of duty is imposed to discourage consumption of tobacco and cigarettes as compared to Pakistan where lowest slab of duty has been imposed at the import stage.
For example, Korea, Indonesia and Malaysia have imposed highest tariff on import of tobacco. In contrast, it appears that FBR has not yet carried out any exercise or international comparison in this regard.
The FBR and the Council must explore possibility to raise duty on the said item for additional revenue generation against proposing taxation measures having direct negative impact on the industry and trade.