The government's tax policy to simultaneously increase Federal Excise Duty (FED) and impose Health Tax on cigarettes would increase the incidence of taxes to record level on tobacco sector, increasing smuggling as well as illicit trade of cigarettes in 2019-20
Experts said that the Federal Board of Revenue (FBR) has opposed Health Tax on tobacco due to the fact that additional taxation under the head of the FED is on cards in coming budget (2019-20). However, the government has also decided to impose Sin Tax or Health Levy on tobacco sector. This means that on one side taxes will be imposed on tobacco sector and health ministry would further propose to increase through health tax or sin tax from 2019-20. The experts have apprehended that the massive raise in taxes on tobacco would immediately result in increase in smuggling and business of non-duty paid cigarettes in 2019-20. Without realizing the fact that over-burdening any sector with additional taxation would be a disaster for that sector, the government is mulling to impose Health Tax and additional FED on tobacco and beverages.
Special Assistant to the Prime Minister on National Health Services Dr Zafar Mirza reportedly said that the government has adopted a creative and innovative way for increasing financing of health budget through imposition of the health tax on tobacco and beverages.
Special Assistant to the Prime Minister on National Health Services Dr Zafar Mirza further stated that the government has decided to impose health tax on tobacco to cut its rising consumption. However, a recent statement of State Minister for Revenue Hammad Azhar talks about the facts and figures on taxation of the tobacco sector.
In one of the recent press conferences, the statement of State Minister for Revenue Hammad Azhar on highest ever projected revenue during 2018-19 from documented tobacco industry clearly reflects the positive impact of current taxation structure of cigarettes on revenue collection.
He said that the revenue collection from documented tobacco industry would be the highest ever during 2018-19. During the first supplementary finance bill, the FBR has considerably increased taxes on the documented tobacco industry which would result in highest amount of revenue from the tobacco sector.
Hammad Azhar further said that the government would fully rely on FBR's credible data for taxation of the tobacco sector and revenue trends, but not merely follow suggestions of the NGOs, the minister for Revenue added.
Experts said that the statement by Hammad Azhar on tobacco sector clearly reflects two things. Firstly, the government fully acknowledges increased revenue collection from the tobacco sector due to the present taxation structure. Secondly, the government would take into account the actual data of FBR before taking any decision on changes of the FED structure on tobacco industry. The government is well aware of the challenges being faced by the documented industry within the context of illicit trade. Moreover, the government also seriously realises that the documented industry is paying highest ever amount of revenue during the outgoing current fiscal year. The government is committed for not taking any decision merely on the propaganda made by the non-taxpaying manufacturers.
The documented tobacco industry is repeatedly urging the government to adopt a balanced fiscal approach with effective enforcement measures to curtail the sale of tax-evaded cigarettes, which would generate revenue over and above Rs 115 billion by the end of 2018-19.
The documented tobacco industry has estimated that the revenue collection is expected to cross Rs 115 billion by the end of 2018-19 and will increase further if the government retains this ex use structure.
The lowest tier should remain intact in coming budget to provide an opportunity to the local units to come into the tax net and enforcement efforts need to be geared up to avoid losses.
The proposal to impose 'Sin Tax' on select sectors of cigarettes and beverages would result in litigations due to its discriminatory treatment and anti-competitive nature having implications for already heavily-taxed sectors.
Tax experts said that the federal government is legally empowered to tax specific class of persons or sectors, but competition laws do not allow creating discriminatory treatment in the market giving edge to some sectors while taxing others for creating discrimination in the market. The component of local tax evasion on cigarettes is already very high and any move to impose Sin Tax would further encourage tax evasion at domestic stage.
The additional taxation in the name of 'Sin Tax' on tobacco industry would create serious complications for the industry at a time when companies have to pay extra Federal Excise Duty (FED) of Rs 26 billion under Finance Supplementary (Amendment) Bill, 2018.
The Finance Act 2018 had increased FED on cigarettes in all three slabs for 2018-19. The rate of duty on locally produced cigarettes was enhanced with the estimate revenue of Rs 107-108 billion in 2018-19 as compared to estimated amount of revenue of over Rs 90 billion in 2017-18. Under the Finance (Interim) Bill, 2018, the FBR has amended the Finance Act 2018 to again increase taxes on tobacco sector for the same fiscal year. The FBR has increased FED on all tiers of cigarettes. Under the revised structure of the FED on cigarettes, the rate of FED has been increased from Rs 3,970 per 1,000 cigarettes to Rs 4,500 per 1,000 cigarettes under tier-1.
Under tier-2, the rate of FED has been increased from Rs 1,776 per 1,000 cigarettes to Rs 1,840 per 1,000 cigarettes. Under Tier-3, the rate of FED has been increased from Rs 854 per 1,000 cigarettes to Rs 1,250 per 1,000 cigarettes.
The impact on price per 20-pack of cigarettes was Rs 12.5 (Tier I) and Rs 11 (Tier III). Under the changes in tobacco sector, the government has enhanced FED on un-manufactured tobacco produced by Green Leaf Threshing (GLT) units from Rs 10 per kg to Rs 300 per kg. The FED on tobacco is adjustable against FED on cigarettes; additional revenue will come through better enforcement on limited number of GLT units.
The FBR has already introduced third tier (third slab of excise duty) on cigarettes. Another form of additional taxation under the cover of Sin Tax is under consideration of the government. This proposed Sin Tax would be considered as a new form of excise, besides three slabs of FED on cigarettes.
The accumulative effect of the additional taxation on tobacco industry through Finance Act 2018 and Finance Supplementary (Amendment) Bill, 2018 is over Rs 100 billion for 2018-19. At the same time, proposed 'Sin Tax' on tobacco industry would result in production of local tax-evaded cigarettes and increase in tax evasion in tobacco sector. Therefore, it would be the third budget for the tobacco industry for the same fiscal year ie. 2018-19. Tax experts have apprehended that there is a very high risk of increase in production of local tax-evaded cigarettes in the country as a result of extra taxation of the tobacco sector in the name of 'Sin Tax', sources said.
As the tobacco sector is already subjected to higher rates of Federal Excise Duty, the additional taxation of Rs 10 per 20 cigarette sticks would result in production of local tax evaded cigarettes. Secondly, tax expert said that the incentive of tax evasion would also increase due to proposed higher taxation of cigarettes. Thirdly, there are apprehensions that the share of illicit sector may again increase in case any move is made to increase further taxation under different names.
Another tax expert said that the major problem with the Sin Tax is that the government wants to impose additional tax on food and beverage items having sugar contents. But ignoring Sin Tax on all food items containing sugar like bakery products, cakes, biscuits, sweets (mithai), etc, would create a serious discrimination with other products having higher sugar contents.