Home Business Tobacco Sector: Third Tier of Excise Duty Results in 19.50 Percent Growth

Tobacco Sector: Third Tier of Excise Duty Results in 19.50 Percent Growth

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The Federal Board of Revenue (FBR) Thursday informed the special parliamentary committee on tobacco sector that the third tier of excise duty on cigarettes has not only helped compliant tobacco sector regain its lost volume, but also resulted in growth of 19.50 percent in revenue during 2017-18 against the same period last fiscal year.

An FBR team of tax officials headed by Chairperson Rukhsana Yasmin informed the special committee that the introduction of the third tier of tobacco has not only helped duty paying tobacco industry regain its lost volume but has also helped the government regain its lost revenue which has increased to Rs 88,540 million during 2017-18 as compared to Rs 74,107 million during 2016-17, registering an appreciable growth of 19.50 percent.

To a query of representative of the Public Accounts Committee (PAC), the FBR officials said that the all data is available with the FBR and Board is ready to share the data with the Public Accounts Committee, if required.

Some committee members raised query why FBR has not conducted audit or survey of the tobacco sector. The special committee headed by Senator Kalsoom Parveen decided that the date of next meeting will be announced after formation of the new government. She also directed the FBR to give details of the breakup of taxes paid by all cigarette manufacturers.

Senator Dr Ashok Kumar endorsed the committee chairperson’s viewpoint that all details including names of owners of cigarette manufacturers, details of factories, raids conducted by tax department and arrests made by them be presented in the next committee meeting.

Dr Ashok also suggested that some viable mechanism needs to be devised to ensure accurate number of buyers and sellers of tobacco.

Responding to different queries, Senior FBR Member Inland Revenue Policy Dr Iqbal said that the FBR’s revenue increased from Rs 74 billion to Rs 88 billion after introduction of third tier on cigarettes.

The FBR officials informed about the ongoing tax evasion by cigarette manufacturers in Azad Kashmir and tribal areas, smuggling of non-duty paid imported cigarettes and measures taken to stop this menace of illicit trade.

Tax authorities categorically 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 i.e. @ 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 87,529 million during the financial year 2017-18 compared with Rs 83,764 million collected in the financial year 2016-17.

The FBR officials informed the committee that payment of sales tax and federal excise duty by tobacco sector which was at Rs 111,886 million during financial year 2015-16 declined to Rs 74,107 million during the financial year 2016-17 when, as already stated, there were only two tiers of tobacco with federal excise duty as high as Rs 1,649 per thousand cigarettes which jacked the prices of tier two cigarettes as high as Rs 72 per packet resulting in capture of market of tier two cigarettes by non-duty paying cigarette industry whose tier two brands were priced in the range of Rs 25 per packet to Rs 30 per packet.

The FBR officials said that the tobacco industry has been subjected to federal excise duty on two tier basis and rates of FED continued to be enhanced from time to time.

Constant increase in FED for tobacco industry led to persistent increase in government revenues up to financial year 2015-16 before registering a sharp decline in financial year 2016-17. In 2013-14, FED & sales tax revenue was Rs 88,277 million; in 2014-15, FED & sales tax revenue was Rs 102,909 million; in 2015-16, FED & sales tax revenue was Rs 114,275 million and in 2016-17, FED & sales tax revenue stood at Rs 83,764 million.

The FBR officials said that main reason for decline in 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 25 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 further informed the committee 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.

The FBR officials informed that market share of the two leading companies which was around 67.72% in 80 billion cigarettes sticks market of the country fell down to approximately 36.60% in the financial year 2016-17.

Responding to different queries of committee, the FBR officials said that to help legitimate cigarette industry regain its lost volumes 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 market 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 87,529 million.

Senator Azam Swati opined that after introduction of 3rd tier, Rs 30 billion revenue loss has been estimated, but the committee should call cigarette companies to give presentation and check/verify the actual figures. “We should invite multinational companies in this regard,” he added.

To this, Kulsoom Perveen said that it is a failure of FBR to introduce 3rd tier. She also asked the concerned authorities to get details of brands of cigarettes being manufactured in Azad Kashmir.

Senator Dilawar Khan inquired form Pakistan Tobacco Board (PTB) if they have any policy/mechanism for monitoring of Green Leaf Threshing (GLT).

Malik Imran, technical advisor of PANAH (an NGO), claimed that two crimes have been committed by the FBR. First is the introduction of third tier and loss of Rs 60 billion due to price manipulation. The FBR has not conducted any survey of on illicit trade and it gets all survey from private cigarette manufacturers. As per NGO’s estimates, there is only 10 percent illicit trade as per its survey.

When Javed Bhatti, Additional Secretary Ministry of Commence, talked about briefing on PTB working, Senator Dilawar Khan asked that this committee is on tax revenue.

During the committee proceedings, FBR Member informed Auditor General’s officials that their officials don’t have actual figures. Responding to this, the AG official said that they made report on available figures at that time.

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