Locally manufactured cigarettes: 'Ad valorem-based excise duty structure to be regressive'

The Federal Board of Revenue (FBR) while discussing a number of proposals for revised federal excise duty (FED) structure for locally manufactured cigarettes has reached a conclusion that any ad valorem based excise duty structure would be regressive and counterproductive.
Sources in FBR said on Sunday that the proposal to make fully specific taxation regime for FED on Tobacco was included in the draft of Tax Laws Amendments Ordinance (2103) after approval of the Ministry of Finance. The Ordinance was however returned by the President with the advice that it should be part of the Finance Bill to be considered by the National Assembly this month.
The proposed system also provides a mechanism for gradual increase in government revenue and would help the government plan its FED collection in advance. The proposal projects that the FED collection will increase by more than 11 percent not only this year but will also continue to increase progressively.
The volume based proposal stipulated that the rate of FED would be Rs 2,325 per thousand cigarettes as opposed to the current Rs 2,045 per thousand sticks for the premium tier and Rs 880 per thousand sticks for the value brand tier instead of current Rs 762 per thousand sticks.
Tax experts believe that FED on pricing of cigarettes rather than volume will be continuation of a complex system. In this case government will have to intervene in the market to enforce pricing to ensure revenue. Price dependent system in the past has also encouraged some small manufacturers to sell their cigarettes at artificially low retail price. Government has already introduced lowest pricing benchmarks for different tiers of Tobacco market.
The new proposed taxation should be easily forecasted and simple to administer, otherwise, it would lead to cheaply illicit cigarettes in the market - a sizeable decrease in the revenue of the FBR - and a serious blow to the local manufacturers as well.
Introduction of reforms in the existing system of excise taxation based on volume will not only simplify the whole process of taxation but also eliminate the dependence on the manufacturer's pricing decision as well. It will help secure the long-term tax base through more predicable revenue growth.
It is interesting to point out here that World Health Organisation in its various reports has suggested that an effective excise taxation regime on tobacco is the one where an excise tax of a specific amount is levied on a given quantity of tobacco such as a cartoon or a pack.