Senate panel recommends abolition of third tax tier for cigarettes

Suggests systematic increase in duty on cigarettes to comply with WHO rules

ISLAMABAD: A parliamentary panel has recommended the withdrawal of third tier of the taxation system for the tobacco industry, which has resulted in an annual loss of Rs33 billion to the national exchequer.

The Public Accounts Committee (PAC), on May 23, 2018, had recommended a special audit by the Auditor General of Pakistan (AGP) of a significant drop in tax collection from the cigarette manufacturing industry.

The AGP, in its report, found that the cigarette manufacturing industry was involved in tax evasion of Rs33 billion. It revealed that a multinational company included its popular brands in the lowest tax tier, which led to increase in its sales and 50% reduction in tax payments.

With the approval of the house, the Senate chairman formed a special committee of the upper house, headed by Senator Kalsoom Parveen and tasked with examining the decline in tax collection from the cigarette industry and making recommendations to the Senate.

The previous Pakistan Muslim League-Nawaz (PML-N) government introduced the third tax tier in 2017. In its report submitted to the Senate, a copy of which is available with The Express Tribune, the parliamentary body recommended that the three-tier taxation system for cigarettes should be scrapped and the government should revert to the previous two-tier system.

It suggested that a systematic increase in federal excise duty (FED) should be made on an annual basis to comply with the World Health Organisation (WHO) rules. It will result in higher revenues for the government as well.

The commerce ministry, in its comments, said it was not taken on board by the Federal Board of Revenue (FBR) while revising the tax policy for the tobacco sector, though the Pakistan Tobacco Board fell within the domain of the ministry.

Representatives of big cigarette companies requested for a level playing field for all manufacturers in the country. They were of the view that tax collection would further increase if recommendations of the committee were implemented.

In its findings after hearing points of view of all stakeholders, the committee concluded that the major cause of decline in tax collection in fiscal year 2016-17 from the tobacco sector was the introduction of third tax tier, which resulted in lower taxes on cigarettes.

The parliamentary body noted that the third tier in FED could not substantially enhance revenues of the government as expected. Furthermore, the third tier, as reported by the Ministry of National Health Services and Coordination, was in contravention of the WHO Framework Convention on Tobacco Control, which had been ratified by Pakistan.

A complete lack of coordination amongst all stakeholders was also noted because the Ministry of Commerce, Pakistan Tobacco Board, tobacco growers and the Ministry of National Health Services stated that the FBR never consulted them while formulating the tax policy for the tobacco sector.

It was noted that the FBR did not have proper resources to fully monitor cigarette manufacturing units, and check smuggling and sale of counterfeit cigarettes in the country. The committee found that under SRO 1,149 the FED on unmanufactured tobacco had been enhanced from Rs10 to Rs300 per kg through an amendment to the Finance Supplementary (Amendment) Act 2018.

It made a highly negative impact on the growers, commercial traders and tobacco dealers. The Pakistan Tobacco Board also reported the same after conducting a survey of tobacco-growing areas.

It was also reported that due to the SRO the export of tobacco by commercial dealers had become negligible, which resulted in unemployment.

The committee was of the view that the matter pertaining to cigarettes manufactured in Azad Jammu and Kashmir could be taken up with the government, but the illicit cigarette units operating in the region formerly called Federally Administered Tribal Areas could neither be stopped from working nor be brought under the taxation system due to exemptions granted to the area.

Published in The Express Tribune, March 8^th, 2019.

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