Dismal tax from cigarette industry: 'MNCs maintain low price to affect revenue collection'

The Federal Board of Revenue has informed the Ministry of Finance that multinational companies have fixed prices of cigarettes lowest in the world, which resulted in low collection of revenues from cigarette industry. Sources told Business Recorder here on Thursday that the cigarette manufacturing giants have deliberately maintained very low retail price structure of cigarettes to avoid actual potential of sales tax and Federal Excise Duty (FED) on different brands.
The collection of taxes from this industry is even low when compared with regional countries. An analysis of the current cigarette market disclosed that almost 90 percent of the market is priced at Rs 33 or less per pack of 20 cigarettes, out of which Rs 28.44 is retail price for FED purpose whereas Rs 4.56 is the amount of sales tax. Such price is almost lowest in the world, which results in low collection of revenues from this segment. It is relevant to mention that due to fair prices, countries like Sri Lanka are collecting almost equal amount of duty/taxes as collected in Pakistan whereas the population of Sri Lanka 1/10th of the size of market in Pakistan.
Moreover, the incidence of duty/tax on this segment (ie 90 percent of the market) is 60 percent or less which is well below the international standard of 70 percent, required to be achieved by signatories of Framework Convention on Tobacco Control (FCTC) ratified under the auspices of WHO Pakistan, which is also a signatory to this convention and has to raise incidence up to 70 percent as well.
The FBR has further conveyed to the Ministry of Finance that during 2011-12, Federal Excise Duty (FED) and Sales Tax (ST) collection from cigarette industry was Rs 53.23 billion and Rs 12.52 billion respectively, which during July-December, 2012 has reached Rs 24.15 billion and Rs 5.57 billion respectively. However, it is felt that the revenue realisation from this industry is not according to its potential.
The present FED structure is a three tier system, in which lowest tier is subjected to specific excise duty only, the highest tier is subjected to ad valorem only whereas the middle tier attracts a mix of both specific as well as ad valorem FED. However, due to 70 percent incremental ad valorem rate on middle tier, there is no incentive for manufacturers to increase the price. As a result, the prices of cigarettes have not increased in real terms in the country since the introduction of three tiers system.
In order to collect due taxes from cigarette industry and to remove the above anomalies, the current three tier system of FED on cigarettes is proposed to be replaced with the two tier system on the locally produced cigarettes, the FBR added.