International brands: Panel on tobacco taxation fails to come up with solid advice

The report by the Special Committee on Tobacco Taxation did not give any solid recommendation on measures to stop smuggling of international brands of cigarettes and production of non-duty paid and counterfeit cigarettes in the country. Experts told this scribe that the committee has made recommendations that ignore the ground realities related to complex tax matters at hand like taxation on tobacco sector and presence of a large tax evading local sector in the country.
The special committee on causes of decline in the tax collection of tobacco sector recommended that a comprehensive strategy be devised to stop smuggling of international brands of cigarettes and production of non-duty paid and counterfeit cigarettes in the country. On one hand, the committee has given recommendation to abolish three-tier tax structure on cigarettes and revert back to two-tier structure, while on the other, a recommendation has been made to conduct a study to control smuggling and counterfeit production of cigarettes.
Interestingly, the committee's recommendation has not specified any ways and means to control smuggling or counterfeit cigarette production, but merely focused on this suggestion. Even any specific department or agency has not been specified for the purpose of this study in the report. The committee's findings to abolish three-tier structure on cigarettes has been based on the suggestions of Ministry of National Heath Service, Auditor General of Pakistan and an NGO without giving any weightage to the analysis and recommendations of the Federal Board of Revenue (FBR), the federal revenue collecting agency.
The study of the report revealed that the committee's overall findings have totally ignored the data and analysis of FBR. In the said report, the FBR has categorically specified in the committee report that the introduction of the third tier in FED helped the duty paying industries in regaining their lost volumes of the sale which led to increase in the revenues of the FBR. Resultantly, there was an increase in the sales tax and excise duty collection during 2017-18 as compared to 2016-17 due to the introduction of the third slab on cigarettes.
However, the committee has countered this argument of huge increase in revenue in 2017-18 with the finding that the major cause of decline in tax collection in 2016-17 in tobacco sector was primarily due to the introduction of the third tier which resulted in lower taxes on cigarettes. The Committee has not realized that 3rd tier was introduced in 2017 and not in 2016, hence the reason for fall in revenues in 2016 - 2017 is attributed to the 2-tier excise structure. The committee has ignored the fact that the tax collection stood at Rs 89 billion in 2017-18, compared to 74 billion collected in the financial year 2016-17.
The committee report has referred to the findings of the Auditor General of Pakistan that the FED on cigarettes should be increased on annual basis. Illicit cigarette trade rose to a staggering 41.4% in May 2017 because of the continuous excise led price increases that led to an increasing price differential between the legitimate and illicit cigarette manufacturers. The same has been practiced recently, whereby, FBR has increased FED on cigarettes twice in the year 2018 - 2019 through the federal budget and the mini-budget.
Moreover, the Health Ministry complained to the committee that the FBR has never consulted it while formulation of the tax policy on tobacco sector. The committee has given due importance to this observation of the Health Ministry without realising the facts that the ministry has failed to implement its own rules and regulations set forth for the tobacco industry. The Health Ministry has already made multiple legislations against promotions and advertisements of tobacco products, mostly cigarettes, but to what extent have these laws been enforced and implementation has been ensured in true letter and spirit is a big question mark on the ministry's performance.
The report of the committee said that the FBR has not consulted Commerce Ministry while formulating tax policy on cigarettes. The question arises whether taxation (sales tax and FED) on cigarette is the domain of the said Ministry, they said.
While giving justification to abolish the third tier, the committee report further highlighted that the incident of illicit trade has not been independently studied. It is pertinent to mention here that the only beneficiaries out of the 2-tier excise system were the illicit cigarette manufacturers that rose to their ever highest share of 41.4% in May 2017. The report itself mentions that in 2015-16, illicit cigarette manufacturers contributed only Rs 1.487 billion out of Rs 90.435 billion and similarly contributed only Rs 1.478 billion out of the total Rs 66.131 billion FED contribution in 2016-2017 by the tobacco industry. "Does such state of affairs not require the need for an independent study on a sector that holds more than 40% of the market share while contributes only 2% of the industry's contribution to the national exchequer?" they questioned.
Furthermore, the experts mentioned that the committee had to evaluate that these illicit manufacturers are involved in fiscal violations i.e. by selling at price points of Rs 15-35 per pack whereby the law has set a minimum price of Rs 47.39 per pack of 20 cigarettes. Apart from these fiscal violations, they are also violating the marketing laws set in place by the Ministry of Health by offering Umrah tickets, motorcycles, discounts, free packs, etc, to end consumers. All of these violations that have gone unchecked by the Ministry of Health did not ultimately result in providing level playing field that led to decreased legitimate sector revenues leading to a sharp decline in the government revenues, they added.
Historically, the industry data indicates that aggressive excise-led price increases create consumer affordability issues and accelerates down trading by the consumer from tax paid to duty-evaded cigarettes.