PAC suggests SC-led investigation into tobacco companies’ tax case

Decision taken on basis of special audit report on causes of decline in tax collection from the tobacco sector

Shahbaz Rana May 24, 2018

ISLAMABAD: The Public Accounts Committee (PAC) has recommended a Supreme Court-led investigation to unmask those who have given a whopping Rs33 billion in benefits to two cigarette manufacturing companies by changing their tax structure.

PAC Chairman Syed Khursheed Shah took the decision on Wednesday on the basis of a special report prepared by the Auditor General of Pakistan on causes of decline in tax collection from the tobacco sector.

Pakistan’s tobacco sector is dominated by two major players - the Pakistan Tobacco Company (PTC) that controls 55% market share, and Philip Morris Pakistan Limited (PMPKL) that has a 43% share - according to the special audit report.

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After the introduction of the third-tier tax structure in May 2017, the two major players shifted their famous brands to the lowest tax slab and sold their cigarettes with 50% reduction in federal excise duty, which enhanced their sales but revenues plunged, according to the audit report.

Against the previous two-tier structure, the FBR introduced a new tier with only Rs800 as federal excise duty, which was 50% less than the lowest previous rate.

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The FBR did not place a restriction on shifting from the second highest slab to the lowest one that gave Rs32.9 billion benefits to PTC and PMPKL in the current fiscal year, according to the report. The PTC got a benefit of Rs24.2 billion and PMPKL benefitted by Rs8.74 billion, according to the auditors.

“There has been no benefit given to Philip Morris,” said a statement issued by the company. “The Federal Board of Revenue (FBR) has increased taxes more than the inflation rate in budget 2018-19. PMPKL is a compliant company, which pays its taxes.”

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A PTC company representative said the company has yet to go through the AGP report.

“We have not seen the AGP report and only came to know about it through the media, said the PTC official. “But prima facie, the report does not reflect the market dynamics of the tobacco industry, he added.

“The introduction of the third tier was aimed at reducing the share of the illicit market.”

The company representative said that consumption has been decreasing marginally every year and within the total 80-billion cigarette sticks market the share of illicit sales has actually increased.

The special audit had been conducted on the directions of the PAC after the FBR sustained a self-inflicted revenue loss of Rs33 billion in just one year due to change in the tax structure. The FBR is clearly at fault and we recommend an investigation led by a senior judge of the Supreme Court who may be assisted by a grade 21 officer of the AGP department, directed the PAC chairman. He said that the responsibility must be fixed for changing the tax structure: no matter even if it was the finance minister.

The PAC chairman also directed that the audit report should also be sent to the Senate Secretariat for keeping a track of the case, as the National Assembly will complete its term on May 31. “The benefits were given after taking benefits,” said Shah. He claimed that he had a list of FBR officials who had taken ‘gifts’.

However, officiating FBR Chairman Tasneem Rehman tried to defend her department but the PAC did not hear her version.

Pakistan has one of the largest populations of tobacco users in the world. About 11.6% of the total population or 24 million people of 15 years and above are smokers. The World Health Organization (WHO) and all other world bodies recommend that 70% of price of the cigarette should be levied as federal excise duty in order to discourage smoking.

Till fiscal year 2013-14, the FBR collected federal excise duty on the basis of two-tier taxes and the industry’s federal excise duty collection was Rs70.73 billion, and 99% of it was paid by the two multinational companies, according to Director General Audit Imdad Ali. The sector paid another amount of Rs17.7 billion in sales tax.

The collection of federal excise duty and sales tax subsequently peaked to Rs114.2 billion by fiscal year 2015-16.

The FBR changed the tax structure even before parliament approved the law, which caused Rs5.7 billion loss in just one month, according to the auditors.

After the introduction of the third tier, sales turnover of PTC increased by 91% and Philip Morris 93% in just the first nine months of the current fiscal year. “Despite up to 93% increase in sales of both companies, the federal excise duty collection remained at Rs60 billion,” according to the special audit report.

In 2016-17, the PTC registered Rs86 billion sales but paid only Rs48.7 billion or 56.5% of sales in federal excise duty. This is far lower than WHO requirement of 72%, according to the audit report. This ratio has further declined in the first ten months of this fiscal year, standing at 42%. From July through April of this fiscal year, both companies recorded Rs142.7 billion in sales but paid only Rs60 billion in federal excise duty, which was equal to 42%, according to the audit report.

The FBR could not achieve its policy objectives attached with the introduction of the third-tier of taxation, according to the main finding of the audit report.

“Reduction in prices due to introduction of third tier has actually promoted smoking in society.” Before price reduction, 23% smokers were smoking less than five cigarettes a day. But after the price reduction now only 1% of the total smokers smoke five cigarettes a day and others have increased consumption, stated the report.

Non-duty paid cigarettes have captured one-fourth of the total market. The weak and inadequate enforcement by FBR field formations has resulted in a huge loss of Rs126.7 billion in the last five years.

The audit has recommended rationalisation of the federal excise duty rates in a manner that significantly increases cigarettes prices and reduces tobacco consumption. 

Published in The Express Tribune, May 24th, 2018.

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