ISLAMABAD: A special committee of the Senate on decline in tax collection from the tobacco industry will meet on Wednesday (today) to probe Rs33-billion loss to the national exchequer due to change in tax structure by the previous government of Pakistan Muslim League-Nawaz (PML-N).
After the introduction of the third duty tier in May 2017, two major industry players shifted their famous brands to the lowest slab and sold cigarettes with 50% reduction in federal excise duty, which enhanced their sales, but government revenues fell, according to an audit report.
The National Accountability Bureau (NAB) initiated probe into the conduct of the Federal Board of Revenue (FBR) and the two multinational companies due to the Rs33-billion loss.
The Pakistan National Heart Association will submit its report to the Senate special committee. In the report, the association has said that the FBR did not conduct any independent research before changing the duty structure.
Average market share of illicit cigarettes is 9% in Pakistan, as indicated in a recent study conducted by the association.
As a result, the government introduced a three-tier tax structure for enhancing revenue collection where federal excise duty was brought down from Rs33.4 to Rs16 for cigarettes having retail price below Rs58.5 per pack.
The association pointed out that the government allowed cigarette manufacturers to move products from the second slab to the third, which resulted in reduction in cigarette prices.
Today, 86% of multinational brands were paying federal excise duty at the lowest rate as the FBR had failed to protect government revenues, the report revealed. It warned that if the trend persisted, small manufacturers would close down and multinationals would be free to dictate their own policies to the FBR.
It said small cigarette manufacturing companies suffered huge losses in fiscal year 2017-18, which resulted in closure of some of them and the rest were fast moving towards shutdown.
In addition to changes in the duty structure, the FBR also established an enforcement cell called the “IR Enforcement Network” to curb the illicit trade of goods including cigarettes.
However, nowhere in the modern world tax had been reduced on cigarettes to tackle illicit trade. “Illicit trade can only be curtailed by effective enforcement by the authorities concerned,” it said.
The target fixed by the FBR for the collection of federal excise duty and sales tax from cigarette manufacturers was Rs126 billion for FY18. However, revenue receipts were around Rs90 billion, falling short by Rs36 billion.
On the other hand, net turnover and net profit of the two multinational companies increased 62% and 218% respectively, as shown in their annual reports.
Furthermore, it said, the state could not dictate minimum price for any product including tobacco as that would be tantamount to curtailing the fair market price and would hamper competition.
Published in The Express Tribune, September 12th, 2018.