Third-tier structure abolished: Gap between documented, illicit brands of cigarettes widens

After abolition of the third-tier in budget (2019-20), the minimum price of legal brand of cigarette pack now stood at Rs 75-165 per pack and non-duty paid brand at Rs 20-30, increasing the gap between documented and illicit brands from June 12, 2019.
The Federal Board of Revenue (FBR) has issued S.R.O.608(l)/2019 to notify enhance rates of Federal Excise Duty (FED) on different brands of cigarettes from June 12, 2019. Through S.R.O.608(l)/2019, the FBR has also accepted long lasting demand of local manufacturers and NGOs for abolishing third-tier.
According to the tweet of Minister of Revenue for Finance Hammad Azhar here on Thursday, the Federal Excise Duty on tier-2 cigarettes increased by Rs 8/pack and that on tier-1 increased by Rs 14/pack in the Finance Bill tabled in Parliament. Excise taxes are levied to curb consumption of items, the tweet added.
Experts said that the government has ended third slab on tobacco structure which is a big achievement for health ministry and PM Focal Person on Polio & Tobacco Control. As a result of increase in the FED on cigarettes, the prices of cigarettes would also be increased.
The new structure of the FED on cigarettes revealed that the government has increased excise, which will increase prices of cigarettes. The legal brand would be sold at Rs 75-165 while duty non paid brands will still be sold at Rs 20-30.
It is a fact that the common users will shift to cheap duty non paid brands and prefer cheap brands of cigarettes. However, the government has not announced any enforcement strategy to deal with the increasing illicit sale of cigarettes. The FBR had issued SRO 250 under which Inland Revenue Enforcement Network will be made and effective from July 2019, but so far it has not been approved.
Thirty-five percent of the cigarette market share in Pakistan is held by the non-tax paying local cigarette manufacturers that sell at an average price point of Rs 28 per pack even though the Government mandates that a cigarette pack cannot sell below the price point of Rs 47.39 per pack with minimum tax being Rs 33 per pack. These manufacturers pay only 2% of the total Tobacco industry tax.
These local non-tax paying manufacturers have not abided by the fiscal laws of this country and the same may be expected from them in the future as well.
The government has increased the FED on cigarettes by Rs 14 & Rs 8 in the Federal Budget 2018-19 and should now focus on nationwide enforcement of existing tobacco control laws to curb illicit trade to ensure that the required increase in revenue is delivered as promised by the State Minister for Revenue, Hammad Azhar.