Local-price new tier: FBR misled by KP based local cigarette manufacturers

The Federal Board of Revenue (FBR) has been grossly misled by the Khyber-Pakhtunkhwa (KP)-based local manufacturers of cigarettes that a "local-price new tier" of the Federal Excise Duty (FED) for local brands be introduced in budget 2020-2021, negating the fact that two FED slabs are already applicable for locally-produced cigarettes.
Recently, local tobacco companies from the KP have submitted their budget proposals to the FBR for 2020-2021 backed by unauthentic data and unrealistic proposals. Tax experts have responded to each proposal of the KP-based local manufacturer and tried to place facts before the budget makers of the FBR.
Tax experts having expertise in tobacco taxation told Business Recorder that the KP-based company has proposed making a temporary change to the current FED structure by splitting the current second-tier into a mid-price tier and a local-price tier. The local-price tier is coupled with a FED and minimum price commensurate with the tax-bearing capacity of local brands.
Over the course of the seven-year period, the minimum price and the FED rate of the local-price tier will rise more sharply than that of higher tiers; this, achieving a high degree of convergence.
At the end of the transition period, a review should be conducted to ensue that the structure that replaces the proposed one is sufficiently sustainable to meet objectives set at that time, it proposed. Experts negated that this is an absurd proposal to have a new kind of FED tier for local brands, since the two tiers in place are only for locally-manufactured cigarettes.
How can the government have a local-local tier? The two tiers are only for locally-manufactured cigarettes and interestingly the largest brands in Pakistan today are local brands. Experts have also cautioned the FBR that there is no Cigarette Manufacturers Association of Pakistan (CMAP), as no such association exits.
It was reported that the CMAP had submitted its budget proposals to the FBR for 2020-2021, but the fact was that no such association was registered with the relevant government departments.
The KP-based manufacturer anticipated that its proposal has the potential to substantially increase duty paid volume and the FED revenue to reach Rs260bn annually at the end of the programme.
Fundamental to its success, will be the FBR's commitment to enforcement, so that all economic operations, large and small, local and foreign, participate to the fullest extent, it proposed.
Responding to this proposal, experts highlighted that the budget proposal submitted by the KP-based cigarette manufacturer has not mentioned anywhere about the actual contribution of the FED and sales tax and income tax by the local companies.
On the other hand, documented and legitimate industry clearly specifies their contributions i.e. legal industry, today pays roughly Rs115 billion per annum. The question arises, whether local companies are committing to pay an additional Rs145 billion per annum to the government under their plan?
Presently, the total contribution of local manufacturers is around Rs2 billion, which is less than two percent of the total collection per annum. The question arises how they would raise their contribution from existing Rs2 billion per annum to Rs145 billion. The KP-based manufacturer proposed to the FBR that the estimates of illicit trade fluctuate from 20 percent of the market to 33 percent of the market, depending on the stud, one relies on.
What is clear is that the high level of illicit trade prevents the orderly functioning of the market and causes the FBR revenue from tobacco FED to be chronically suboptimal. What is often underestimated is the lack of competitiveness suffered by local firms and brand as unintended by product of the FED structure.
The root cause of the competitiveness problem is the arbitrary level of the unique minimum price, which causes competitive dynamics to concentrate around the minimum price point, currently Rs62.76. This dynamic is exacerbated by tobacco control measures restricting marketing and packaging freedoms which have a disproportional damaging effect on the ability of local brands smuggled from abroad have doubled in volume in the past 12 months alone to eight percent of the market.
It is clear that squeezed in between duty-paid international brands and smuggled international brands, local brands are at serious competitive disadvantage, which now puts their sustainability at risk, the KP-based local unit proposed. A detailed look at the proposal of the KP-based cigarette manufacturer revealed that the demand is to reduce the minimum price to a point at which they are currently selling so that the allegation of discounting and selling below minimum pride goes away.
Secondly, the taxes per pack are being asked to be below their minimum price, hence all allegations of tax evasion will be legally covered, tobacco experts stated.
Interestingly, the rates that they are proposing for themselves at those rates they will have to sell 180 billion extra cigarettes per year. Are they suggesting that they will increase the smoking prevalence in Pakistan, they question.
Moreover, no government or policy makers will create situation to drive foreign investment out of Pakistan, are they trying to push the FDI out of Pakistan? The KP-based manufacturer proposed to the FBR that aside from Covid-19, the pressures on Khyber-based tobacco unit and other Pakistani tobacco companies have increased steadily over time, and the competitiveness of local brands has been eroded by a combination of international brands priced closely to the minimum price limit, and illegally-imported brands, who are able to grow uncontrolled and without making any contribution to the Pakistani society.
Responding to this last proposal, the tax experts said that the local companies were trying to put blame on documented tobacco industry, which was the major revenue spinner of the FED and top contributor in taxes.
Secondly, the KP-based manufacturer is trying to propose to the FBR to further reduce the minimum sale price on the assumption that the documented sector is having major chunk of market. However, the KP-based manufacturer has not committed any specific figure of revenue/FED in the budget proposal 2020-2021.
The KP-based manufacturer proposed that a fundamental pre-requisite to the temporary, transistionary FED structure is a significant strengthening of the government's enforcement capability to ensure full compliance with the system by all operations.
Strongly reacting to this, tax experts stated that the two major companies were fully ready to install "track and trace" at their factories for monitoring and sale of the finished products to ensure enforcement.
Whether local units of KP are ready for "track and trace" to assist the FBR's major enforcement exercise to check illicit trade of cigarettes, they added.
The IR Enforcement Network needs to intensify efforts with the customs to check smuggling of foreign brands cigarettes.