‘Hike in FED on cigarettes likely to dent govt revenue’

Analyst says 98% of revenue collected is borne by two companies

LAHORE:

The hike in federal excise duty (FED) on cigarettes in the recent Finance Bill is likely to put a dent on tax revenues the government earned from the legitimate tobacco sector, said industry analysts.

The Federal Board of Revenue (FBR) collected over Rs526 billion in revenues from the cigarette industry during the last four years, but 98% of the revenue was borne by the organised and legal cigarette industry, consisting of only two companies.

In Pakistan, 52 cigarette companies sell a total of 80 billion sticks of cigarettes annually. In the overall market, the share of the two companies doing business by paying taxes legally is only 60%, while the share of illegal cigarette brands is 40%, but the rest of the companies together pay only 2% taxes, they added. The federal government has collected Rs124 billion rupees from the cigarette industry in fiscal year 2018-19, Rs117 billion in FY2019-20, Rs135 billion in FY2020-21, and Rs150 billion in FY2021-22.

While a target of Rs200 billion has been set for tax collection from the industry for FY2022-23, collection is likely to take a significant drop in the next two years due to the increase in down trading of cheap illegal cigarettes.

According to statistics, when taxes and excise duty on cigarettes increased in Pakistan, the illegal market for cigarettes became wider.

“The government has made the cigarette industry a source of revenue that is paving the way for illegal sale of cigarettes,” said Muhammad Awais Ashraf, Head of Research at Foundation Securities Limited.

“A hike in the legal price of cigarettes increases the probability of inflation-stricken consumers switching to cheaper cigarettes or directly consuming tobacco,” he said, adding that, “Due to the non-uniform application of laws and the cigarette industry not being provided a level playing field, the government itself is facing a huge loss of revenue along with the legal industry.”

Currently, the government is facing losses of Rs80 billion annually, due to illegal cigarette trade in Pakistan, collecting far less tax than its potential.

“The government needs to ensure uniform application of laws and enforcement against illicit cigarette manufacturers. Without strict enforcement, the current revenue stream will keep shrinking,” said Ashraf.

It is worth mentioning here that the FBR faced a shortfall of Rs212 billion in the first eight months of the current fiscal year 2022-23, however, there is hope that they can bridge the gap after a massive increase in FEDs on cigarettes and 1% increase in general sales tax (GST).

“Rather than adding further tax burdens on a sector already heavily taxed, it is high time the government implements policies in the right direction during these difficult economic times. To achieve this, illicit manufacturers and traders will have to be brought into the tax net through effective enforcement of laws, monitoring and crackdowns,” suggested Ashraf.

Published in The Express Tribune, March 9^th, 2023.

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