The Competition Commission of Pakistan has declared that the Federal Board of Revenue may legally determine the minimum price for the purposes of levying tobacco tax on cigarette manufactures. However, the FBR may not stop manufacturers, wholesalers or retailers from selling cigarettes below that price.
In this connection, the CCP on Wednesday issued an advice to the FBR for compliance. Pursuant to a public hearing, the FBR and the manufacturers of cigarettes were advised to stop mandatory publication of advertisements pertaining to minimum retail price of cigarettes with immediate effect.
The CCP explicated that sharing of information such as price tables may facilitate anti-competitive behaviour by potentially eliminating uncertainty as to the future conduct of market share competitors and inevitably affecting future commercial policies. However, FBR may require manufacturers to print the maximum retail price on cigarette packs in unambiguous terms.
The CCP stated that the printing of a maximum retail price on cigarette packs would have a three fold advantage. Firstly, it would not in any manner impact FBR attempt to plug the loopholes in the current tax collection system as the FBR could continue to prescribe the minimum retail price for the purposes of levying and collecting tax.
Currently, the FBR taxes the manufacturers, however retailers' cigarette prices are far above the manufacturers suggested retail price resulting in significant profits to the retailer all the while evading tax on the price differential. Secondly, it would prevent retailers from overcharging consumers because the price would be capped at the maximum retail price. Lastly, if at all, placing the maximum price on cigarette packs has an impact on pushing prices up.
Increased cost may help in deterring and discouraging consumers from use of cigarettes, thus addressing consumer health concerns advanced by the Health Ministry. The CCP took suo motu notice of advertisements, published in June 2008, by leading tobacco companies of Pakistan pertaining to pack prices of cigarette brands.
The Commission also took notice of an advertisement by the FBR printed in August, 2008, declaring a minimum price for cigarettes and rendering it illegal to sell cigarettes below such minimum price. The fixing of minimum prices appeared to be a prima facie violation of Section 4(1) of the Competition Ordinance, 2007.
However, considering the plea of the manufacturers and FBR that the alleged actions were undertaken as per the taxation laws of Pakistan, the Commission, instead of conducting an enquiry under Section 37(1) and/or initiating proceedings under Section 30 of the Ordinance, chose to conduct an open hearing and issue an opinion under Section 29 (c) of the Ordinance as to whether there is any conflict under the existing laws in this regard and if so, how could these concern be addressed.
The Commission after having appreciated the scheme of law (in view of the cited provisions) is of the considered opinion that the conflict does not exist in the legal framework but rather it arises when FBR oversteps the mandate envisaged under law. The Federal Excise Act 2005 (hereinafter the 'Excise Act') empowers FBR to fix minimum prices only for the purposes of levying and collecting taxes and duties, and not for the purpose of selling cigarettes.
The restriction imposed by the FBR on manufacturers and other persons associated with the cigarette business of not selling cigarettes below its prescribed minimum price is not envisaged under law. Section 12 (4) of the Excise Act and Section 2 (27) of the Sales Tax Act, 1999 clearly provide that the retail price is to be fixed by the manufacturers and the law does not by any means bar manufacturers from selling at a retail price below or above the minimum retail price prescribed by FBR.
Hence, while FBR may legally set a minimum price on cigarettes to impose tax upon, it may not stop the manufacturers, wholesalers or retailers from selling the cigarettes below that price. Thus it is the implementation and not the law that is giving rise to an anomalous situation. The Commission is of the view that where manufacturers enjoy dominance in the relevant market, printing either minimum or maximum prices may have anti competitive effects.
However, if a choice has to be made, the maximum price is a better option because it is considered to have some pro-competitive effects. Perusal of the tax laws in Pakistan indicates that cigarette manufactures are supposed to print maximum prices on cigarette packs. According to Section 12 (4) of the Excise Act, in case of intra brand price difference, the price to be printed on the packs is the maximum retail price of that brand.
However, a misconception has emerged in the market that the prices printed on the cigarette packs is a minimum retail price set by the manufacturers. Moreover, the retail prices published in the newspaper advertisements are likely to be misconstrued as the fixed retail price of cigarettes rather than manufacturers recommended price. This appears to be in contravention of Section 10 (2) (b) of the Ordinance, which deems distribution of information lacking reasonable basis related to the price of goods as deceptive marketing.
The consumer must, in our view, be clear as to what Retail Price/MRP stands for as it can be interpreted either as; (1) 'Manufacturer's Recommended Price', (2) 'Minimum Retail Price', or (3) 'Maximum Retail Price'. In our considered view, if FBR would require the manufacturers to print the maximum retail price as 'Max RP' it would remove any misconception in the mind of consumers regarding price. The FBR and the manufacturers are advised to stop publication of advertisements.