ISLAMABAD: The anomaly created by the Federal Board of Revenue (FBR) in new excise duty structure of cigarettes to keep minimum price artificially low would increase illicit trade from 35 percent to 60 percent and a sales tax loss of Rs19 billion.
In a media briefing session arranged by Pakistan Tobacco Company Limited (PTC) on Friday, Syed Asad Shah Director Legal and External Affairs PTC expressed serious concerns over anomalies in the mini-budget due to the unprecedented increases in FED with irregular increases in threshold which will not help achieve revenue targets. The FBR’s move will only encourage tax evasion and sales of non-duty paid and smuggled cigarettes across Pakistan.
In the recent budget, the government has increased the FED rates for Tier 2 brands by Rs. 3000 per 1000 sticks to Rs5,050 and by Rs. 10,000 per thousand sticks for Tier-I brands to Rs16,500. This has resulted in an increase of 146 percent to 154 percent, respectively.
The retail price threshold; however, was increased from Rs6,660 to Rs9,000 per thousand sticks – a 35% increase only. If cigarette prices cross Rs. 9,000 per 1000 sticks, it will attract a Rs16,500 rate and lower will fall in the Tier-II rates.
The industry estimated to deposit Rs 185 billion as taxes during 2022-23, but 150 percent raise in the FED would only result in total revenue of Rs 205 billion against projected Rs 282 billion. The negative impact of the measures would be visible in the next two years.
The official stated that according to calculations, if 30% of Tier-II volumes start selling at minimum legal price, then just the loss of sales tax revenue to the government will be Rs. 19 billion. This is because the minimum legal price has not increased in line with past practice.
Syed Asad Shah stated that the Retail Price Threshold (RPT) used to move in line with the increase in Tier-1 FED but this time there is a deviation from the past precedent and not increasing the RPT systematically will have multiple negative implications. The Minimum Legal Price (MLP) is set at 45% of the Retail Price Threshold, now increased to 60%. Unfortunately because the Retail Price Threshold did not increase as per past precedent, there was negligible increase in the minimum legal price (MLP). Currently the MLP stands at Rs108. This means the lowest price of any packet of cigarettes as per law is Rs108.
As expensive cigarettes become even more expensive, cheaper cigarettes continue to remain cheap as the floor, the minimum price of a packet of cigarettes has not increased in line with the Tier 1 increase, with the MLP the 45% of the Retail Price Threshold.
PTC requested that the retail price threshold should increase in line with the increase in Tier 1 rates so that the minimum legal price in the country comes up and criticism that Pakistan has the lowest-priced cigarettes stops. It is perceived that Pakistan has one of the lowest weighted average cigarette prices in the world. This is because more than one third of the market is illegal and sells below the minimum price and tax applicable per packet of cigarettes, Syed Asad Shah maintained.
According to PTC officials, this will not only severely impact the sustainability of legitimate businesses but will also impact exports, foreign direct investment, employment etc.
Syed Asad Shah believed that a rational tax increase with corresponding Retail Price Threshold and consequently Minimum Legal Price increase coupled with stringent actions against illicit cigarette trade and across the board implementation of track and trace system will help government generate more revenue from the industry.
Copyright Business Recorder, 2023
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