The Federal Board of Revenue (FBR) is considering policy issues on tobacco taxation whether merely a raise in Federal Excise Duty (FED) rate on cigarettes in budget (2017-18) would increase revenue from documented sector and decrease illicit trade of non-duty paid smuggled/counterfeit cigarettes.
Sources told Business Recorder here on Friday that the ongoing budget finalization exercise is seriously considering some policy issues on cigarettes. Firstly, it is being examined that heavy taxation on cigarettes is the only way to generate additional revenue from tobacco sector. Moreover, burdening the documented companies would result in increase in FED from this sector. However, the FED on cigarettes would be revised during the upcoming budget, sources added. Secondly, whether the FBR has ever asked the law enforcement agencies to give data of smuggled cigarettes confiscated by the LEAs?
Thirdly, whether the FBR has directly interacted with the tax authorities of Azad Jammu and Kashmir (AJK) to check why the manufacturers in Mardan have shifted their investment to AJK. When tax laws in Mardan and AJK are the same, what is the incentive available to the manufacturers of cigarettes in Mardan to move their entire setup to AJK. Without incentive of tax evasion, why manufacturers in Mardan have shifted their investment to AJK? Smuggled cigarettes are used by elite class and mostly available in markets of urban centers. Till now, no consolidated efforts have been seen to check these smuggled items.
Experts said that the widening price gap between the legal and tax evaded cigarettes is the key driver of demand for tax evaded cheap cigarettes widely available across the country. While legal cigarettes today sell for Rs 72 per pack, tax evaded cigarettes are easily available at an average price of Rs 25.
In recent months, the FBR has intensified its enforcement efforts against smuggled and local tax evaded cigarettes by setting up Tobacco Squads to conduct raids across the country, leading to unprecedented crackdown against these tax-evaded cigarettes. Despite commendable efforts of the Tobacco Squad against these illicit cigarettes, there appears to be no decline in their demand.
With reducing disposable household income in the country and excessive increases in legal cigarette prices, smokers have shifted their consumption from tax paid cigarettes to cheap tax evaded cigarettes. This implies that the total cigarette consumption has not reduced in Pakistan and rather remained stable due to the presence of cheap illicit cigarettes. According to a Nielsen report, Pakistan ranks fourth in Asia in terms of illicit cigarette consumption. As a result, the national exchequer continues to face a loss of up to Rs 45 billion annually that hinders the country's socio-economic progress. Lack of a level playing field for the tax paying sector discourages both domestic and foreign investment that in turn adversely impacts economic growth, job creation and technology transfer in Pakistan. Growth in Illicit cigarette trade also puts the livelihood of more than 75,000 farmers and 400,000 retailers at stake.
While enforcement action is needed to continue to act as a deterrent, other fiscal and regulatory measures need to be explored to discourage the consumption of illicit cigarettes. The challenge of illicit cigarette trade in Pakistan is too big to be overcome only by an enhanced enforcement drive. While the enforcement network can manage to tackle supply side of the problem, efforts need to be made to ensure that the demand for illegal cigarettes is reduced.
Under pressure from WHO Framework Convention on Tobacco Control (WHOFCTC), the government has imposed high excise tax increases to raise the price of cigarettes over the past few years. It was assumed that this step would boost government revenues and curb smoking incidence. However, this tax policy needs serious consideration taking into account economic realities in the country. Persistent increase in taxes has actually decreased the weighted average price of cigarettes and had the unintended consequence of encouraging illicit cigarette trade. As affordability becomes an issue, consumers have switched to the more affordable, illicit substitutes such as Dubai and Swiss International that are readily available for as low as Rs 12 per pack. This selling price is significantly below the minimum applicable tax of around Rs 43 per pack, but there has been no action from Ministry of Health. Consequently, the government's revenue collection has been hit badly and it will most likely fall short by almost 40 percent of the target revenue from tobacco sector for the current fiscal year, experts added.
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