MNCs submit new taxation structure on cigarettes

Multinational cigarette manufacturing companies on Thursday submitted new taxation structure on cigarettes to the Federal Board of Revenue (FBR) without any price increase on cigarettes, which is totally against the FBR proposal to merge existing three slabs into two slabs of the Federal Excise Duty (FED).
Sources told Business Recorder that Ansar Javed Chairman, FBR met the representatives of two cigarette manufacturing companies here at the FBR House here on Thursday. Beside tax managers, Director General Intelligence and Investigation Inland Revenue (IR) and Director General Intelligence and Investigation Customs were also present in the meeting.
Against the FBR proposal of merging two slabs of FED on cigarettes into two slabs, manufacturer said that the move to raise taxes would decrease the overall volume and sales of cigarettes in the country. Taxation policy should be drafted in such a way so that the price of the cigarettes should not be increased to avoid decrease in business volumes and sales in the market. This proposal of the multinationals was totally against the FBR's recent proposal to introduce a very simple FED structure on cigarettes. The FBR's last proposal focused on revision of the FED slabs whereas the manufactures talked about stagnant price structure on cigarettes to increase business volumes and sales in the market.
Tax policy of the cigarette manufactures talked about no increase in tax rates as compared to the FBR's original proposal to revise slabs for increasing the incidence of the FED on cigarettes, sources maintained. The agenda of the meeting was tax stamping and new excise structure on cigarettes. The representatives of the multinationals also brought some foreign brands of cigarettes having tax stamps on them. The issue of Tax Stamping was not discussed in the meeting. The second agenda item of new taxation structure on cigarettes was discussed between manufacturers and tax authorities.
During two hours meeting between the multinationals and the tax authorities, the representatives of two cigarette manufacturing companies persistently insisted that the volume of business could be increased without any increase in price of the cigarettes. If volume would increase, it would automatically increase its sales. Ultimately it would also have positive impact on revenue without increasing price of various brands of cigarettes. They said that without increasing price of the cigarettes, more tax could be generated by increasing volumes of the business, sources said.
The FBR had proposed the Ministry of Finance that two slabs structure be introduced on cigarettes. Under first proposed slab, if retail price exceeds Rs 50 for 20 cigarettes, rate of the FED would be 65 percent of the retail price. The second proposed slab said if retail price does not exceed Rs 50 for 20 cigarettes, the rate of the FED would be 25 paisa per each stick plus 50 percent of retail price. The two new slabs would be applicable on multinational companies following amendment in the Federal Excise Act 2005.
Sources said that the existing three slabs were proposed to be replaced with two slabs of the FED on cigarettes. The existing upper-tier slab, middle-tier slab and lower-tier slab have been merged into two simple slabs of the FED.A new structure of the FED on cigarettes was forwarded by the FBR to the Ministry of Finance. The new slab structure was devised in such a manner to generate an additional amount of Rs 5 billion from the new FED structure on cigarettes, sources said.
Under existing slab structure, the slab number nine of the FED for cigarette industry is the upper tier slab. The slab number 10 for the cigarette manufacturers is the middle tier slab. The slab number 11 on cigarettes is the lower tier slab subjected to the FED. The slab number nine said that the rate of the FED would be 65 per cent of the retail price on locally produced cigarettes if their retail price exceeds Rs 22 and 86 paisa per ten cigarettes. The slab number 10 said that the rate of the FED would be Rs 7 and 2 paisa per ten cigarettes plus 70 per cent per incremental rupee or part thereof on locally produced cigarettes if their retail price exceeds Rs 13 and 36 paisa per ten cigarettes but does not exceed Rs 22 and 86 paisa per ten cigarettes. The slab number eleven said that the rate of the FED would be Rs 7 rupees and 2 paisa per ten cigarettes on locally produced cigarettes if their retail price does not exceed Rs 13 and 36 paisa per ten cigarettes.
A comparison of old and proposed slab structure revealed that the new structure is very simple. All brands of cigarettes would fall under respective slab depending on retail price of cigarettes as per FBR proposal. The FBR had suffered huge revenue loss of Rs 5.02 billion during February-June 2013 following delay in merger of existing three slabs of Federal Excise Duty (FED) on cigarettes into two slabs. The FBR was unable to amend the Federal Excise Act 2005 through a statutory regulatory order (SRO). Finance Act can amend the relevant Schedule of the Federal Excise Act 2005.
According to the FBR's calculations, the Board has projected extra revenue of Rs 5.02 billion for period February-June 2013. The calculations were made on number of cigarettes packets sold in the existing three slabs. The FBR calculated that revenue of Rs 0.65 billion would be generated from existing lower slab of cigarettes during this period. The FBR said that Rs 0.65 billion has been calculated on the basis of 150 million packets of cigarettes being sold in five months (February-June 2013). The minimum increase in FED/pack with current retail price comes to Rs 4.32.
The middle slab of cigarettes would generate extra revenue of Rs 4.37 billion during this period. The FBR has worked out that revenue of Rs 4.37 billion would be generated from existing middle slab of cigarettes during February-June 2013. The FBR said that Rs 4.37 billion has been calculated on the basis of 1100 million packets of cigarettes being sold in five months (February-June 2013). The minimum increase in FED/pack with current retail price comes to Rs 3.97 under middle slab of cigarettes. As per FBR's working on revised slabs, Board has calculated zero FED from the upper slab after merger of three into two slabs of FED on cigarettes. The 150 million packets of cigarettes being sold in the upper slab were incorporated in the middle slab.
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 proposal added.