Federal Board of Revenue (FBR) has managed to collect Rs 70 billion as Federal Excise Duty (FED) on cigarettes as of April 2014, and is well placed to collect Rs 87 billion on this account by the end of the current fiscal, a 14 percent YoY increase in collection.
The success is attributed to a two tier fully specific excise system, adopted by the Federal Board of Revenue (FBR) last year. Like all systems, this was an evolution of the excise system by FBR, as it embraced a new formula, and tested uncharted waters. The results were unprecedented with the revenue generated already set to surpass the projected targets.
It may be mentioned here that Pakistan is a market where illicit tobacco products' share in the market is increasing since last few years. In Pakistan, where illicit cigarettes account for nearly 25.4% of total cigarettes consumed, the exchequer is denied Rs 26.9 billion in tax revenues annually, had this percentage been legal tobacco sales.
Sources in FBR said that after some low FED collections in the first half of the fiscal year, proposals were floated in the revenue collection authority to bring drastic changes to the excise structure for the rest of the fiscal year and next fiscal. But the recent figures of FED collection have once again proven that with 14% YoY increase, the structure introduced last year has paid dividends.
As the budget planners huddle to prepare budget 2014-15, Government of Pakistan is also being nudged by the World Health Organisation (WHO) to comply with the universal structured approach of a 70% tax incidence. This will again be a step that will encourage illicit tobacco trade since implementation in Pakistan is weak and tax evasion is rampant.
Studies all over the world show that Excise incidence is flawed approach as it is a one size fits all bases for setting tax policy, as the WHO has acknowledged in its own country research. The absurdity of putting the incidence in the forefront of tax policy is evident. Prices are different from country to country. Levying 70% on a pack of cigarettes sold in one country at USD 0.3 yields only USD 0.21 which equals to just 10% tax incidence in another market where a pack sells at USD 2.10.
Economic experts believe that, Article 6 of the FCTC, however, guarantees sovereign decision-making on fiscal policies and Pakistan should be exercising that right according to the market dynamics of the country. Sudden and Increased FED incidence could result into further squeeze on the legitimate market and adversely impact the tax revenues for the collectors.
International experience, including that of the European Union (EU) accession countries, clearly shows that countries which have implemented the sort of substantial tax increases that the WHO's proposals would imply have seen a sharp rise in illicit trade in cigarettes, damaging the long-term tax base and undermining public health objectives.
According to a September 2013 study by the International Tax and Investment Center and Oxford Economics on illicit tobacco trade, in 2012, The bulk of illicit cigarette volume in Pakistan is sold at PKR 10 - 15 (USD 0.1 - 0.15) per pack, well below the minimum legal price of PKR 34.77 (USD 0.35) per pack set by the government. The legal industry's volume has dropped from 76 Billion sticks to 64 Billion sticks due to a very steep excise hike in 2009.
Steep increase in excise duties make cigarettes unaffordable for smokers, the easy and cheap availability of other tobacco products such askhaini, gutka, niswar etc will result in a shift to such products. This will have undesirable public health impact and the revenue loss will be inevitable as the other tobacco products are least or not regulated at all compared to cigarette industry.
Economic experts believe that at this point of time when the government is struggling to meet its revenue targets and the illicit trade is increasing exponentially causing billions in foregone revenue, experimenting with the excise structure or introducing steep excise hikes as proposed by WHO will not only undermine governments health and fiscal objectives but will make the legitimate tax paying industry vulnerable and non-competitive.
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