An upward trend in revenue collection of the Federal Board of Revenue (FBR) from tobacco sector has been witnessed during last three fiscal years after introduction of third slab of FED on cigarettes from Rs 111 billion in 2015-16, Rs 74 billion in 2016-17 and now Rs 89 billion during 2017-18.
The facts sheet on revenue collection prepared by the FBR revealed a comparison of FED/sales tax collection from tobacco sector before and after introduction of third slab of FED on cigarettes. The comparison has been made on the basis of FED and sales tax collection figures of 2015-16, 2016-17 and 2017-18 based on factual data.
The FBR data further revealed that before the introduction of third tier, persistent increases in federal excise duty (FED) for tobacco industry counterproductively boosted the undocumented tobacco sector. The government revenues had recorded an increase up to financial year 2015-16 (Rs 111 billion) before registering a sharp decline for the first time in many years in 2016-17 (Rs 74 billion). This dip in revenue collection was caused by growth in demand of illicit market of cigarettes in Pakistan to about 40 percent of total demand.
The FBR data revealed that the FED/sales tax collection had recorded an increase up to financial year 2015-16 (Rs 111 billion) before registering a sharp decline for the first time in many years in 2016-17 (Rs 74 billion).
However, the introduction of third tier of FED @ Rs 800 per thousand cigarettes with effect from 29.05.2017 has in fact helped arrest further decline in tax revenue from tobacco sector evident from collection of FED and sales tax at Rs 89 billion during the financial year 2017-18 compared with Rs 74 billion collected in the financial year 2016-17.
The FBR said that the introduction of third tier of FED @ Rs 800 per thousand cigarettes with effect from 29.05.2017 has in fact helped arrest further decline in tax revenue from tobacco sector evident from collection of FED and sales tax at Rs 89,529 million during the financial year 2017-18 compared with Rs 74,107 million collected in the financial year 2016-17.
Documents available with this correspondent disclosed that the third tier of excise duty on cigarettes resulted in growth of 19.50 percent in revenue during 2017-18 against the same period last fiscal year. The introduction of the third tier of tobacco has helped the government regain its lost revenue which has increased to Rs 89,529 million during 2017-18 as compared to Rs 74,107 million during 2016-17, registering an appreciable growth of 19.50 percent.
The FBR documents said that the factual data rebuts the common perception that introduction of third tier of federal excise duty has led to decline in tax revenue. The massive decline in revenues from tobacco sector was witnessed during the financial year 2016-17 when FED on tobacco was levied on two tier basis only and has been at the highest for tier two cigarettes ie @ Rs 1,534 per thousand cigarettes with effect from June 4, 2016 and @ Rs 1,649 per thousand cigarettes with effect from 01.12.2016. Introduction of third tier of FED @ Rs 800 per thousand cigarettes with effect from 29.05.2017 has in fact helped arrest further decline in tax revenue from tobacco sector evident from collection of FED and sales tax at Rs 89,529 million during the financial year 2017-18 compared with Rs 74,107 million collected in the financial year 2016-17.
The FBR documents said that main reason for decline in the government revenue was due to the fact that prices of cigarettes, particularly of tier-2 category consumed by lower and middle income groups marketed by duty paying cigarette industry, rose to the price levels of around 72 per 20 cigarette whereas cigarettes marketed by non-duty paying illegitimate cigarette industry were available in the market in the price range of Rs 20 to Rs 30 per 20 cigarette packet. This significant price differential, particularly in a low-income group country like Pakistan, led to capture of significant market share of cigarettes by non-duty paying cigarette industry particularly during the year 2016-17 and this seriously dented government''s revenue as well.
The FBR documents said that the decline in market share of duty paying legitimate cigarette industry is evident from the following data of cigarettes sold by two major multinational companies which contribute almost 98% of tax revenues from tobacco industry: During period of 2015-16, 54,177 million sticks were sold and during the period 2016-17, 29, 278 million sticks were sold. To help legitimate cigarette industry regain its lost volumes that tax evading sector has taken and the government its lost revenue, a third tier of federal excise duty was introduced through Finance Act, 2017 prescribing federal excise duty @ Rs 800 per thousand cigarettes which has enabled duty paying cigarette industry to sell their lower brands at around Rs 48 per 20 cigarettes packet, still significantly higher than cigarettes marketed by non-duty paying segment of cigarette industry. Introduction of third tier has helped the government recoup its lost revenues indicated from the fact that during period of 2017-18, 57,955 million sticks were sold and FED & sales tax revenue was Rs 89,529 million, it added.