The Federal Board of Revenue (FBR) has estimated a colossal revenue loss in the collection of Federal Excise Duty (FED), against the estimates of over Rs 103 billion from cigarette industry in 2014-15 following increase in the size of Graphical Health Warning (GHW) on cigarette packs.
A senior government official told Business Recorder Friday that the FBR has opposed the notification of Minister for National Health Services, Regulation & Co-ordination ("MNHSRC") for increasing GHW on cigarettes. From the angle of revenue collection, it would be a serious setback to the FED head of indirect taxes collection during 2014-15. When the GHW proposal was under consideration, the FBR had warned the authorities about serious revenue implications on the indirect taxes collection.
The documented cigarette manufacturers had committed with the FBR to deposit revenue to the tune of Rs 103 billion during 2014-15. Every year, the FBR has been able to get increase of 10-15 percent in FED collection from cigarette manufacturers. It is strongly apprehended that the FED collection from cigarette industry would witness sudden downward following increase in the size of the GHW. There is a fear that the cigarette industry might not be able to meet the budget target of FED worth Rs 103 billion set for 2014-15. The baseline of FED set for the cigarette industry would also be seriously affected in view of expected shortfall in collection in 2014-15. Obviously, when the cigarette industry would not be in a position to show committed growth of 10-15 percent in collection, the FBR cannot direct the industry to show 20 percent increase in FED for projections of 2015-16. For the past many years, the cigarette industry witnessed 10-15 percent annual growth in FED collection. This consistent growth would seriously affect implementation of decision of the GHW on cigarette packs.
If there would be a decrease in revenue collection from cigarette industry in 2014-15, it would have direct negative impact on the tax projections for the said industry in 2015-16, official said.
The FBR has also apprehended that the smuggling of foreign cigarettes would also increase due to expected decrease in sales on locally manufactured cigarettes. The people would prefer to consume smuggled cigarettes without pictorial GHW. Moreover, business of cigarette manufactures in undocumented sector would grow and tax evasion would subsequently increase. The introduction of such a measure would encourage smuggling of Pine and other such cigarettes.
The official raised a question whether banning liquor in Pakistan has really ended its demand from the market? Moreover, whether ban on liquor has resulted in zero consumption in the country? Same is the case of cigarette, the government can raise taxes or prices of cigarettes to check its consumption but increase in GHW would only result in increase in smuggling. On the other hand, users would continue to consume tobacco and prefer smuggled products. It seemed that percent GHW on cigarette packs are not the right approach to check consumption, but it would encourage illicit trade of cigarettes.
Different government departments can raise awareness against the consumption of tobacco products instead of hampering revenue collection, he added. Both the leading cigarette manufacturers have conveyed to the FBR that projected revenue collection from legitimate tobacco industry will witness a major shortfall in 2014-15 following increase in the size of GHW on cigarette packs front/back to 85 percent (currently 40 percent) by March 30, 2015. Such ad hoc initiatives will negatively impact the projected future government revenue growth and contribution. Responding to this, FBR official endorsed the viewpoint of the cigarette manufacturers that it would defiantly have negative impact on revenue collection of the FBR. It is also right that there is no consistent and credible evidence that extra-large GHW will have any discernible impact on reducing or discouraging tobacco use.
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