BAT threatens to exit over tax hikes

ISLAMABAD:

British American Tobacco on Tuesday warned it may pull out investment from Pakistan if the government further increases taxes on cigarettes in the budget, stating that existing taxation has already caused a 38% slump in sales and increased the size of the illicit sector to 58%.

The company conveyed its concerns about the shrinking regulated tobacco sector and the growing illicit cigarette market due to fiscal policies, said Michael Dijanosic, Regional Director for Asia Pacific, Middle East, and Africa at British American Tobacco (BAT).

The BAT delegation separately met with Prime Minister Shehbaz Sharif and the Special Investment Facilitation Council (SIFC) national coordinator Lt General Sarfraz Hussain. The company made its intentions public amid dwindling investment in Pakistan, which dipped to a 50-year low of 13.1% of GDP. The government has also notified a new SIFC Cabinet Committee, incorporating Chief of the Army Staff General Asim Munir and national coordinators as co-opted members of the committee.

BAT is the largest global tobacco firm, and its local affiliate, Pakistan Tobacco Company (PTC), is projected to pay Rs220 billion in taxes to the government this fiscal year out of the Rs265 billion paid by the entire tobacco sector.

The formal tobacco sector paid nearly Rs700 billion in taxes to the government during the past five years, said Dijanosic. The company has also invested in setting up a Global Business Centre in Lahore and plans to expand operations if the government reviews its taxation policies. “The past couple of years’ developments on fiscal policies have raised questions about the sustainability of the company’s operations in Pakistan,” said Dijanosic while talking to a group of journalists after meeting with the prime minister and SIFC’s national coordinator.

In the last budget, the government significantly increased taxes on tobacco, which instead of curbing smoking resulted in shifting smokers from tax-paid expensive brands to cheaper illicit brands.

If there is a repeat of last year’s tax increase, there is no reason the company should not exit Pakistan, said Dijanosic.

It has never happened in history that the Rs265 billion tax collection from the tobacco sector this year would be less than the sector’s total potential of Rs570 billion, said Asad Shah, a senior official of PTC.

The regional director said that the federal excise duty increased by 73% in real terms in the past two years, and as a result, the company’s sales dropped by 38%, making it unviable to do business. He further said that despite a 73% inflation-adjusted increase in taxes, the government’s revenues grew only 8% in real terms due to the slump in sales.

As a result of the abnormal increase in taxes, the share of illicit and untaxed cigarettes has increased from 22% to 58%, said Dijanosic. The total estimated annual sales of cigarettes are around 80 billion sticks, and estimates suggest that 46 billion sticks in Pakistan are sold without paying taxes.

Any further increase in federal excise duty rates in the budget would bring the factories to a standstill, and due to the subsequent unsustainable business model, the company may move to another destination, said the BAT official. To a question, the regional director said that the government was open to discussions, but the real test would be the budget.

When asked whether the SIFC has promised to help, Dijanosic said that the SIFC acknowledged the problems and challenges the tobacco sector was facing, including increasing sales of illicit and untaxed cigarettes.

Dijanosic said that the status quo, coupled with strong enforcement action against illicit and untaxed cigarettes, can provide a base for working in Pakistan.

According to estimates shared with the government, a 25% increase in the federal excise duty rate would reduce revenues from the tobacco sector by 15% in the next fiscal year. Projections show that in case of further tax increases, collections would decrease from Rs265 billion this fiscal year to Rs225 billion next fiscal year, said Shah.

If we do not have a sustainable case for the local market, there is also no reason to continue exports from Pakistan to other countries, said another BAT official present at the meeting.

PTC has been exporting cigarettes to numerous world markets since 2019 and has so far earned $156 million for the country. For the next fiscal year, the company is targeting $60 million in exports, but one-third of the order is at stake due to the Ministry of Health’s reluctance to amend the Statutory Regulatory Order (SRO) for export purposes.

However, Prime Minister Shehbaz Sharif on Tuesday approved setting up a committee to review the regulations hindering exports to overseas markets.

In March, the prime minister awarded the second-highest taxpayer award to PTC in all categories of taxes. PTC was the only non-government-owned firm among the top five recipients of the highest taxpayer award in the category of all taxes. One reason for earning the award was the heavy indirect taxation on tobacco to discourage smoking.

Heavy taxation has adversely affected the balance sheets of regulated tobacco multinational manufacturers, but local unregulated brands are thriving in their businesses in connivance with government departments.

Published in The Express Tribune, May 29^th, 2024.

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