ISLAMABAD: Amid high possibility of reverting back to the old two-tier tax system for the tobacco industry, Pakistan Tobacco Company (PTC) – the sector’s largest player – has warned that any such move could severely affect its business.
Two multinational cigarette companies reaped windfall gains in the last fiscal year after the Pakistan Muslim League-Nawaz (PML-N) government reduced federal excise duty (FED) by introducing a third tier for tax collection.
PTC’s after-tax profit more than doubled from Rs6 billion in 2016-17 to Rs12.9 billion in FY18.
“If the government ends the third tier and introduces a steep increase in FED, the cigarette manufacturing sector will face a massive dent in its sales and finances,” said PTC Corporate Finance Head Mohammad Waqas Bhatti while talking to the media.
The change in tax system for the tobacco sector is among the proposals which the finance ministry is expected to lay before the federal cabinet. Despite the massive increase in profits of cigarette manufacturers, the government’s FED revenues remained more or less unchanged.
In May last year, the then government introduced the third tier for FED collection from cigarette manufacturers and claimed that it would raise revenues by an additional Rs50 billion. Many termed the move a favour for two multinational companies at the expense of national exchequer. The government’s revenue generation from FED dropped from Rs92 billion in 2015-16 to Rs67.2 billion in 2017-18, a reduction of Rs25 billion or 40%.
The introduction of the third tier led to an increase of just Rs1 billion in FED collection in FY18 compared to a year earlier, which was lower than regular growth.
Former FBR chairman Tariq Pasha had claimed before the Senate standing committee on finance that the third tier would help increase tax collection from Rs66 billion in 2016-17 to Rs111 billion.
The PTC official said the third tier decision was not a tactical move rather it was a strategic decision. He claimed that in three years the FED collection would surge from Rs67 billion to over Rs100 billion.
If the government scraps the third tier, it will hit 80% of PTC’s sales volume. The company’s two famous cigarette brands fall in the lowest tax slab which contribute 80% to its sales volumes, according to Bhatti.
PTC has 70% market share in the formal tobacco sector.
At the time of scrutiny of the budget, the Senate standing committee on finance had also recommended the abolition of the three-tier tax system. Expensive cigarette brands fall in the first tier, which attracts highest taxes, followed by the second and third tiers, which attract low tax rates.
The formal sector claimed that after the introduction of the third tier, the overall share of illicit cigarette trade fell from 41.2% to 33.3% within a year. However, the claim could not be independently verified.
The industry claims that cigarette consumption has been on the decline for the last six years, dropping from 81.7 billion sticks in 2012 to 79.8 billion sticks now.
It also said the government increased tax burden on the industry by 87% from 2013 to 2017 before it was brought down by introducing the third slab.
The increase in the illicit sector’s share led to a drop in the share of the formal sector from 66 billion sticks in 2013 to 29 billion sticks in 2017 that also caused losses to government revenues, said PTC Senior Corporate Affairs Manager Noor Aftab.
Published in The Express Tribune, September 13th, 2018.