Finance Bill 2018 has proposed to retain third tier (third slab) of federal excise duty (FED) on cigarettes in 2018-19 with increase in the incidence of the FED for all three excise slabs on this item.
Sources told Business Recorder here on Thursday that Finance Bill 2018 has proposed three slabs of the FED on cigarettes for 2018-19. The FBR may generate additional revenue to the tune of Rs 8-10 billion through the revenue generation measures to be announced on April 27 (today). However, the percentage of the FED has been increased through the revised slabs to be approved by the federal cabinet on Friday (today).
The industry had proposed to the government to continue with existing three-tier taxation system and persistent efforts against illicit cigarettes in an effective manner. The FBR has accepted the proposal of the documented industry and decided to retain third tier (third slab) of federal excise duty (FED) on cigarettes which would counter tax evaded cigarettes.
According to sources, cigarette manufacturers have estimated that tax contribution of leading cigarette manufacturers to the FBR would reach Rs 120 billion in the next two years if third tier (third slab of federal excise duty) and enforcement against illicit cigarettes continue with full force. The contribution of documented industry into taxes can go up to Rs 120 billion against Rs 90-92 billion projected collection for outgoing fiscal year. The market share of illicit cigarettes stands at 35 percent and by reducing 10 percent, the tax collection can easily go up by Rs 10 billion.
The FBR was optimist that the third tier of FED on cigarettes has resulted in sudden increase in FED collection in 2017-18 which may cross Rs 90 billion by the end of 2017-18. It is a good fiscal policy which should be sustained and continued in the next three years, sources maintained.
They said that the tobacco industry comprises 80 billion sticks and the industry is declining in the range of 0.2 to 0.4 percent on per annum basis. The market share of illicit trade has dropped from 45 percent to 35 percent with introduction of third tier taxation system and enforcement steps taken by the FBR. With introduction of third tier slab, they said that shift occurred from usage of illicit cigarette to legal brands because price differential was narrowed down by reducing taxes on third tier in last fiscal year. They explained that the share of 35 percent illicit cigarette could be termed as size of Rs 35 billion cost for the national exchequer and mainly influential people were part and parcel of this mafia. Despite introduction of third tier taxation, the price of branded cigarette stands at Rs 48 per packet while price of illicit tobacco packet is Rs 24 on average but the price differential should not be increased in such a way that may cause closing down of formal sector.
They said that tobacco industry had contributed Rs 110 billion in fiscal 2015-16 but with increase in tax rates, the collection nosedived to Rs 74 billion in 2016-17. In the mid of 2017-18, the FBR introduced third tier taxation system and it is now hoped that the tax collection can touch Rs 90-94 billion by end-June 2018.
Sources added that after careful deliberations in budget 2017-18, the FBR had adopted a policy stance to introduce the third slab of cigarette taxation as a way to boost revenue collection from documented sector and decrease illicit trade of non-duty paid smuggled/counterfeit cigarettes.
This third tier remained as the most effective policy measure in the tobacco industry to check sale of non-duty paid cigarettes coupled with effective enforcement.