While the decision came under heavy criticism from some quarters, the Senate Standing Committee has also concluded that the introduction of third tier was intended to curb illicit trade and not a violation of any international commitments. Last month, an order from President Office also dismissed Federal Ombudsman's recommendations against the third slab "as having been passed sans-jurisdiction".
According to estimates, the market share of illicit cigarette brands had reached as high as 40 per cent in 2017. The policy to impose high cigarette taxation to meet public health objectives had also failed to yield desired results as smoking incidence has remained stable in Pakistan. At the same time, the national exchequer faced a loss of around Rs 50 billion as the legitimate businesses witnessed an alarming decline in volumes.
Figures of FBR show that before introduction of the third slab, revenue from tobacco industry stood at Rs 88.40 billion in 2013-14, Rs 102.88 billion in 2014-15, Rs 114.19 billion in 2015-16 and Rs 83.69 billion in 2016-17. In September last year, the FBR Chairman Tariq Pasha briefed the Senate Standing Committee on Finance that increase in federal excise duty on tobacco encouraged legal trade of the commodity and would enhance revenue generation from the sector.
While it is too early to comment on revenue collection estimates for this fiscal year, the initial signs are encouraging as FED payments by two leading cigarette manufacturers have improved as volumes shift back to the legitimate sector. In the aforementioned briefing session, the Chairman FBR had also highlighted the unprecedented crackdown by tax authorities against supply chain of illicit cigarette manufacturers based in Azad Jammu & Kashmir (AJ&K) and Mardan.
The authorities have successfully confiscated millions of tax evaded cigarettes in raids across the country. Their efforts have been further encouraged by a landmark decision of Lahore High Court (LHC) that has granted them legal power to inspect and monitor the trade of cigarettes manufactured in AJ&K.
To achieve its tax collection target and control proliferation of non-tax paid cigarettes, the government should focus on continuity of policy measures and ensure their effectiveness by monitoring compliance of the minimum pack price as stipulated by law.