Cigarettes, beverages: Proposed ''Sin Tax'' to result in litigations: experts

The proposal to impose ''Sin Tax'' on select sectors of cigarettes and beverages would result in litigations due to its discriminatory treatment and anti-competitive nature having implications for already heavily-taxed sectors.
Tax experts told Business Recorder that the federal government is legally empowered to tax specific class of persons or sectors, but competition laws do not allow creating discriminatory treatment in the market giving edge to some sectors while taxing others for creating discrimination in the market.
The component of local tax evasion on cigarettes is already very high and any move to impose Sin Tax would further encourage tax evasion at domestic stage.
The additional taxation in the name of ''Sin Tax'' on tobacco industry would create serious complications for the industry at a time when companies have to pay extra Federal Excise Duty (FED) of Rs 26 billion under Finance Supplementary (Amendment) Bill, 2018.
The Finance Act 2017 had increased FED on cigarettes in all three slabs for 2018-19. The rate of duty on locally produced cigarettes was enhanced with the estimate revenue of Rs 107-108 billion in 2018-19 as compared to estimated amount of revenue of over Rs 90 billion in 2017-18.
Under the Finance Supplementary (Amendment) Bill, 2018, the FBR has amended the Finance Act 2018 to again increase taxes on tobacco sector for the same fiscal year. The FBR has increased FED on all three tiers of cigarettes. Under the revised structure of the FED on cigarettes, the rate of FED has been increased from Rs 3,970 per 1,000 cigarettes to Rs 4,500 per 1,000 cigarettes under tier-1.
Under tier-2, the rate of FED has been increased from Rs 1,776 per 1,000 cigarettes to Rs 1,840 per 1,000 cigarettes. Under Tier-3, the rate of FED has been increased from Rs 854 per 1,000 cigarettes to Rs 1,250 per 1,000 cigarettes.
The impact on price per 20-pack of cigarettes will be Rs 12.5 (Tier I) and Rs 11 (Tier III). For Tier-2, the impact would be around 7 paisas only. However, the impact on Tier III is more as enhancement in duty is more because of low existing rates.
Under the changes in tobacco sector, the government has enhanced FED on un-manufactured tobacco produced by Green Leaf Threshing (GLT) units from Rs 10 per kg to Rs 300 per kg. The FED on tobacco is adjustable against FED on cigarettes; additional revenue will come through better enforcement on limited number of GLT units.
The FBR has already introduced third tier (third slab of excise duty) on cigarettes. Another form of additional taxation under the cover of Sin Tax is under consideration of the government. This proposed Sin Tax would be considered as a new form of excise, besides three slabs of FED on cigarettes.
The accumulative effect of the additional taxation on tobacco industry through Finance Act 2017 and Finance Supplementary (Amendment) Bill, 2018 is over Rs 100 billion for 2018-19. At the same time, proposed ''Sin Tax'' on tobacco industry would result in production of local tax-evaded cigarettes and increase in tax evasion in tobacco sector. Therefore, it would be the third budget for the tobacco industry for the same fiscal year i.e. 2018-19.
Tax experts have apprehended that there is a very high risk of increase in production of local tax-evaded cigarettes in the country as a result of extra taxation of the tobacco sector in the name of ''Sin Tax'', sources said.
As the tobacco sector is already subjected to higher rates of Federal Excise Duty, the additional taxation of Rs 10 per 20 cigarette sticks would result in production of local tax evaded cigarettes. Secondly, tax expert said that the incentive of tax evasion would also increase due to proposed higher taxation of cigarettes. Thirdly, there are apprehensions that the share of illicit sector may again increase in case any move is made to increase further taxation under different names.
Another tax expert said that the major problem with the Sin Tax is that the government wants to impose additional tax on food and beverage items having sugar contents. But ignoring Sin Tax on all food items containing sugar like bakery products, cakes, biscuits, sweets (mithai), etc, would create a serious discrimination with other products having higher sugar contents.
For example, Sin Tax has been proposed to be imposed on cigarettes and sugary beverages, as the PTI government is committed to increasing the health budget by five percent of GDP and needs funds.