Tobacco industry protests tax lacuna
According to calculations by industry experts, with 30% of industry volumes being sold at the minimum price, the loss of sales tax revenue to the government will be Rs19 billion annually. Photo: file
The tax authorities have left a lacuna in a statutory book, which will prove injurious to the health of foreign tobacco brands and also hurt government revenues due to a disproportionate increase in the minimum sale price of cigarettes and federal excise duty (FED) rates.
Through the mini-budget, the government has rightly increased the FED rate on cigarettes up to 154%, but it has increased the minimum retail price threshold by only 35% - a mismatch that one of the two big tobacco companies say has drastically reduced its profit margins and will also hurt the government’s General Sales Tax (GST) revenue from these brands.
In the budget, the government increased the FED rate for the less expensive brand by Rs3000 per 1000 sticks to Rs5,050 and by Rs10,000 for expensive brands to Rs16,500. This has resulted in an increase of 146% to 154%. The minimum sale price threshold, however, was also increased from Rs6,660 to Rs9,000 – a surge of 35%. If the cigarette price crosses Rs9,000 per 1000 sticks, it will attract a Rs16,500 rate.
As a result, against the minimum retail price of Rs108 per pack for less expensive brands, the FED component is now Rs101 – leaving only Rs7 for the companies to operate within. Even if these companies increase the prices to the maximum limit of Rs180 per pack for the less expensive brands they are still unviable against illicit players.
After the government plugged a loophole that could have allowed manufacturers to shift their expensive brands to a less expensive category to evade taxes, the proportionate increase in the minimum price threshold would have fetched in Rs15 per pack additional sales tax.
At Rs108 minimum price, the government will get nearly Rs20 in GST. Had it made the proportionate increase in minimum price, the per-pack GST would have been Rs35 at least.
As a result, cigarette prices would still remain lower by Rs15 per pack on account of lower GST despite a significant increase in their rates due to a 154% increase in the FED rate.
According to calculations by industry experts, at 30% of industry volumes being sold at the minimum price, the loss of sales tax revenue to the government will be Rs19 billion annually.
In addition, the low increase in the minimum sale price has also put the foreign tobacco companies at a disadvantaged position against illicit cigarette manufacturers that were earlier controlling about one-third of the total market.
It seems as if the Federal Board of Revenue (FBR) is favouring low-priced cigarettes and giving affirmation to the allegations that Pakistan has the lowest price of cigarettes in the world, according to one of the tobacco firms.
The Pakistan Tobacco Company (PTC) – the leading market player – has taken up the issue with Finance Minister Ishaq Dar, requesting him to address this anomaly, which could otherwise hurt government revenues and the company’s operations in Pakistan too.
The Federal Excise Act governs the taxation structure and pricing for the tobacco sector. The FBR has made certain amendments to the law to comply with World Health Organisation (WHO) regulations and a demand by the International Monetary Fund (IMF) to raise the rates to make cigarettes expensive in Pakistan.
We will take this opportunity and bring on record that the recent unprecedented increases in FED applicable on cigarettes will not deliver the intended objectives and instead result in abnormal increases in illicit cigarette trade, causing severe operational challenges for the legitimate industry in Pakistan, according to the PTC letter to Dar.
The government is expecting Rs60 billion in additional collections from the increase in the FED rate but the industry people claim that due to the disproportionate increase in minimum price and shifting of sales to the informal sector, the maximum additional revenue will be Rs26 billion in four and half months.
The company stated that there will be limited upward pricing space for the legitimate industry in the less expensive category considering the retail price threshold has not moved significantly. Over 90% of the volume lies in less expensive brands, if pricing ability is impeded then volumes will fall significantly as the relatively less expensive brands cannot absorb the expensive brand excise rates, according to the company officials.
The FBR’s response was awaited until the filing of the story.
FBR officials, however, said that that the available range for retail price exclusive of sales tax was Rs180 per packet to Rs108 per packet. They added that Rs108 was the lowest threshold below which a manufacturer cannot sell cigarettes and this is still more than the total FED payable on a pack of cigarettes of 20 sticks which is Rs101. They added that it was highly unlikely, and also against common business practices, to sell cigarettes at the absolute minimum price.
Published in The Express Tribune, February 22nd, 2023.
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