The Federal Board of Revenue has dropped the idea of merging existing three slabs of Federal Excise Duty (FED) on cigarettes into two slabs prior to budget (2012-13), withdrawing a major taxation measure meant for accelerating revenue generation in 2012-13.
Sources told Business Recorder here on Wednesday that the FBR was unable to obtain approval from the Ministry of Finance for introducing a simple FED structure on cigarettes to generate additional revenue during remaining period of current fiscal. The FBR had moved the summary to the Ministry of Finance as revenue generation measure, however now the proposal would be finalised in consultation with the two cigarette manufacturing multinational companies. It appears that the new FED structure to be applicable from next fiscal year, incorporating viewpoint of the multinational companies.
Sources said that the government has also taken other taxation measures to generate revenue except increase in the rate of the FED on cigarettes. Among all taxation proposals, increase in the FED on cigarettes was the major revenue generation step in the second half of 2012-13.
However, the FBR was unable to convince the economic managers and cannot obtain due approval of the Ministry of Finance for revising the FED structure on cigarettes. The revision in the FED structure on cigarettes would be done in consultation with cigarette manufacturing giants in future.
The FBR has imposed standard rate of sales tax on import and local supply of tea by abolishing lower rate of 5 percent charged previously. The 16 percent sales tax has also been imposed on the polypropylene and polyethylene. The concessionary rate of 3 percent withholding tax applicable on industrial import of edible oil was withdrawn and now the standard rate of 5 percent tax will be applied on industrial import of edible oil in 'Minimum Tax Mode'.
The FBR has imposed 5 percent withholding tax on the import of commercial and industrial importers, gold, mobile telephone sets, silver, all fibres, yarns, fabrics and goods covered by the sales tax zero-rating regime. The Board has also imposed 2 percent sales tax on five leading export sectors including textile.
On the other hand, the government is not ready to increase the rate of the FED on the item injurious to health. The FBR has already has informed the Ministry of Finance that multinational companies have fixed prices of cigarettes lowest in the world, which resulted in low collection of revenues from the cigarette industry.
The FBR has further conveyed to the Ministry of Finance that during 2011-12, Federal Excise Duty (FED) and Sales Tax (ST) collection from cigarette industry was Rs 53.23 billion and Rs 12.52 billion respectively, which during July-December, 2012 has reached Rs 24.15 billion and Rs 5.57 billion respectively. However, it is felt that the revenue realisation from this industry is not according to its potential.
An analysis of the current cigarette market disclosed that almost 90 percent of the market is priced at Rs 33 or less per pack of 20 cigarettes, out of which Rs 28.44 is retail price for FED purpose whereas Rs 4.56 is the amount of sales tax. Such price is almost lowest in the world, which results in low collection of revenues from this segment. It is relevant to mention that due to fair prices, countries like Sri Lanka are collecting almost equal amount of duty/taxes as collected in Pakistan whereas the population of Sri Lanka 1/10th of the size of market in Pakistan.
Moreover, the incidence of duty/tax on this segment (ie 90 percent of the market) is 60 percent or less which is well below the international standard of 70 percent, required to be achieved by signatories of Framework Convention on Tobacco Control (FCTC) ratified under the auspices of WHO Pakistan, which is also a signatory to this convention and has to raise incidence up to 70 percent as well.