ISLAMABAD: The documented tobacco industry has submitted four major proposals in the coming budget (2022-23) including Rs 300 advance tax on unmanufactured tobacco, across the board implementation of track and trace, enforcement of existing law to check illicit cigarettes and registration of all brands with the Federal Board of Revenue (FBR).
While talking to journalists on Monday, Noor Aftab, senior regulatory affairs manager Pakistan Tobacco Company, said that the share of illicit cigarettes has increased up to 40 percent in Pakistan as per surveys/studies and research by international organisations, which is alarming. The illicit cigarettes by evading both excise and sales taxes become affordable compared to legal, tax-paid alternatives causing the consumers to down trade.
The document industry contributed the highest revenue during the last two years. The revenue jumped from Rs 117 billion in 2019-20 to Rs 134 billion in 2020-21. The expected revenue in 2021-22 has been estimated at around Rs 150 billion by the end of the current fiscal year.
Multiple laws already exist and if enforced rigorously can bring down the incidence of the illicit segment and help the government in raising more revenue as well as save youth from smoking hazards.
At present, almost 13 law enforcement agencies have jurisdiction over laws pertaining to controlling illegal activities in the cigarette trade.
Noor believed that the illicit tobacco mafia does not comply with the fiscal laws of the country leading consumers to downshift to cheaper and low-quality products. The government needs to tighten its enforcement efforts to control fiscal leaks as well as help achieve its health agenda of ensuring the non-availability of cheaper brands and loose cigarettes.
The PTC urged policymakers to come up with a long-term strategy with stern actions against wrongdoers otherwise if the upward trend of illicit market share continues then it will pose a serious threat to the business sustainability of the legitimate industry and continue to keep compromising the government’s fiscal and regulatory agendas.
Senior officials of the said multinational cigarette manufacturing company further informed that all existing and new manufacturers are required to register the brand of each product under the FBR’s sales tax general order. Out of 211 brands, only 16 brands have applied for the license. The remaining 195 brands have yet not been registered with the FBR. The enforcement is key for easy confiscation of unregistered brands.
He said that the FBR’s track and trace system would only be successful if it is implemented across the board. Only three companies are in the process of implementing the track and trace. Three Tobacco Manufacturers have signed the Tri-Partite Agreement, whereas four local manufacturers have obtained a restraining order from the Peshawar High Court to stop the FBR from forcing them to sign the TPA.
They informed that the regularizing Green Leaf Threshing Units is necessary to check the illicit trade of cigarettes. The GLT’s Across Pakistan is a source of basic raw material for tobacco manufacturers.
As per Finance Act 2019, a Rs 10 per kg advance tax was implemented on tobacco purchases. In 2018-2019, the said advance tax was increased to Rs 300 per kg by the government, which has no impact on the farmers as the manufacturer is liable to pay. The lobbying by the illicit cigarette manufacturers led to a reversal to Rs 10 per kg. Another proposal is that the federal excise duty on unmanufactured tobacco needs to be increased to at least Rs 500 per kg. Different reports launched by international reputed research organisations in the last few years highlighted the unprecedented growth in the share of illicit cigarettes in the Pakistani market.
According to a report by the PWC 2021, the illicit cigarettes market share is nearly 37.6 percent which is causing almost Rs 78 billion of revenue loss to the national exchequer. IPSOS report regarding tax evasion in Pakistan in five major industries quoted that almost 40 percent market share has been captured by the illegal cigarettes mafia by violating minimum tax and minimum price criteria.
Shopkeepers in major markets of cities and towns across Pakistan are openly selling illegal cigarette packs with a price of around Rs 15 to 35 which is far below the minimum price of 20-cigarette pack. More than 200 local illicit cigarette brands are selling between Rs 20 and Rs 40, whereas, the mandated minimum price is Rs 62.76 inclusive of a minimum tax per pack of Rs 42.12. These violations compromise the government’s fiscal objectives and the public health agenda.
In 2021, the government promulgated a law regarding brand licensing that binds cigarette manufacturers to register their brand before launching that into the market. The law was introduced to discourage illegitimate brands from entering the market.
However, the implementation of the law is very weak and still more than 150 unregistered brands belonging to local tobacco manufacturers are being openly sold in the market. Only 16 cigarette brands have applied for registration so far.
On the other hand, the government introduced a track and trace system in the tobacco sector to control tax evasion. Only three companies so far are in the process of implementing the system that requires huge investment while local players are hesitant to implement the system so they continue to dent the economy by flouting laws to evade taxes.
Four of the local cigarette manufacturers have been awarded stay orders from the court, creating delays in implementation, Noor Aftab added.
Copyright Business Recorder, 2022
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