Leading cigarette manufacturers: Tax contribution to reach Rs 120 billion with FED's 3rd slab

The documented tobacco industry has estimated that tax contribution of leading cigarette manufacturers to the Federal Board of Revenue (FBR) would reach Rs120 billion in the next two years if third tier (third slab of federal excise duty) and enforcement against illicit cigarettes continue with full force. The board members of Pakistan Tobacco Company (PTC) told a selected group of journalists after holding annual general meeting (AGM) here on Friday, "Our contribution into taxes can go up to Rs120 billion and enter into club of paying over $1 billion mark in next 1-2 years against Rs90-92 billion projected collection for outgoing fiscal year. The market share of illicit cigarettes stands at 35 percent and by reducing 10 percent, the tax collection can easily go up by Rs10 billion. We propose to the government to continue with existing three-tier taxation system and persistent efforts against illicit cigarettes in big way." The PTC Board comprises renowned former bureaucrats and others belonging to banking and other prestigious institutions of the country.
During the meetings, tax authorities were optimist that the third tier of FED on cigarettes has resulted in sudden increase in FED collection in 2017-18 which may cross Rs90 billion by the end of 2017-18. It is a good fiscal policy which should be sustained and continued in the next three years. They informed that the Large Taxpayer Unit (LTU) Islamabad and Regional Tax Office Peshawar have recommended to the FBR to retain third tier (third slab of Federal Excise Duty) in coming budget (2018-19).
When asked why the Large Taxpayer Unit Karachi has recommended that third tier is causing revenue loss, they said they are not aware of such recommendation as their units fall within the jurisdiction of LTU Islamabad.
After taking stern actions by the FBR on enforcement front, 50 percent illicit tobacco industry shifted their business from KP to Azad Jammu and Kashmir (AJK) and according to the estimates done by PTC, the AJK government could generate tax revenues to the tune of Rs7 billion by bringing them into tax net. "We have informed the AJK authorities that they can generate Rs7 billion revenue per year by charging sales tax and FED on locally produced cigarettes within the areas of AJK," they said. The board members of PTC asked the FBR to enhance the existing 5 percent withholding tax on tobacco to 10 to 15 percent and argued that it was not tax imposed on tobacco farmers. "We are willing to pay this adjustable withholding tax because it discourages informal and illegitimate sector," they added. They said that the tobacco industry comprises 80 billion sticks and the industry is declining in the range of 0.2 to 0.4 percent on per annum basis. The market share of illicit trade has dropped from 45 percent to 35 percent with introduction of third tier taxation system and enforcement steps taken by the FBR. With introduction of third tier slab, they said that shift occurred from usage of illicit cigarette to legal brands because price differential was narrowed down by reducing taxes on third tier in last fiscal year. They explained that the share of 35 percent illicit cigarette could be termed as size of Rs35 billion cost for the national exchequer and mainly influential people were part and parcel of this mafia. Despite introduction of third tier taxation, the price of branded cigarette stands at Rs48 per packet while price of illicit tobacco packet is Rs24 on average but the price differential should not be increased in such a way that caused closing down of formal sector.
They said that the tobacco industry had contributed Rs110 billion in fiscal 2015-16 but with increase in tax rates, the collection nosedived to Rs74 billion in 2016-17. In the mid of 2017-18, the FBR introduced third tier taxation system and it is now hoped that the tax collection can touch Rs90-94 billion by end-June 2018.