Experts told Business Recorder here on Wednesday that the third tier (third slab) of FED on cigarettes has not resulted in revenue loss, but increased FED collection from the from the documented cigarette manufacturers in 2017-18. Certain quarters have given a wrong impression that third tier has benefited the cigarette manufactures, but practically it substantially raised revenue collection of the FBR from the manufactures.
Due to this third tier and it's effective enforcement illicit volumes and market share has declined which is why a campaign has started against the measures taken by FBR. Local players are campaigning to remove the third tier. What seems worrisome is that why they would want this? Why would a manufacturer want to sell at higher prices and pay more tax? The reason is simple: because their brands are duty evaded and do not pay the requisite taxes and sell at well below the minimum taxes and prices applicable in the country. Selling at such low prices, the FBR has actually helped them to increase prices and come in the tax net. However they are aggressively opposing this and not leaving any stone unturned.
Any investigation of the issue pertaining to the third tier could simply be verified from the data of FED collection prior to introduction of third slab and collection of FED after enforcing third slab on cigarette. At the same time, the decline in illicit sale of non-duty paid cigarettes needs to be taken into account during 2017-18. Moreover, the change in tax policy on cigarettes in the form of third tier proved to be the most effective revenue generation measure to increase FED from documented sector.
It has been apparently alleged that third tier allowed two manufacturers to benefit by Rs 32.9bn. It has been further stated that two large companies shifted their popular brands to the lowest tax tier, thereby increasing sales and cutting taxes by 50 percent. The matter of the fact is that slowly the consumption is shifting back to the legitimate sector thereby bringing back the declining Government revenue to an upward trend. The third tier allowed the local illicit packs that were evading taxes and selling as low as Rs 25 to bring their prices up and into the tax net. The actual excise has increased and taxes have not been cut by 50%. Furthermore, a benefit of Rs 32.9 billion would not be possible as the profit of the two manufacturers does not match up to that amount.
During the review of Finance Bill 2018 at the Senate Standing Committee of Finance, FBR Chairman Tariq Pasha said that the documented cigarette industry was expected to contribute Rs 92-93 billion in 2017-18 as compared to Rs 82 billion (actually Rs 74 billion and reminder were tax prepayments in this financial year) in previous fiscal year. Due to introduction of third tier of Federal excise Duty (FED) on cigarettes, the revenue collection from the cigarettes has witnessed substantial increase. At the same time, the sale of cigarettes manufactured by the legitimate sector also increased. He categorically said there was no convenience between the FBR and multinational cigarette manufacturing companies on the third tier.
Finance Act 2018 has retained three slabs of the FED on cigarettes for 2018-19. The FBR may generate additional revenue to the tune of Rs 8-10 billion through the revenue generation measures in 2018-19.
According to sources, cigarette manufacturers have estimated that tax contribution of leading cigarette manufacturers to the FBR would reach Rs 120 billion in the next two years if third tier (third slab of federal excise duty) and enforcement against illicit cigarettes continue with full force. The contribution of documented industry into taxes can go up to Rs 120 billion against Rs 90-92 billion projected collection for outgoing fiscal year. The market share of illicit cigarettes stands at 35 percent and by reducing 10 percent, the tax collection can easily go up by Rs 10 billion.
The FBR was optimist that the third tier of FED on cigarettes has resulted in sudden increase in FED collection in 2017-18 which may cross Rs 90 billion by the end of 2017-18. It is a good fiscal policy which should be sustained and continued in the next three years, FBR sources maintained.
They said that the tobacco industry comprises 80 billion sticks and the industry is declining slightly per annum basis. The market share of illicit trade has dropped with introduction of third tier taxation system and enforcement steps taken by the FBR. With introduction of third tier slab, they said that shift occurred from usage of illicit cigarette to legal brands because price differential was narrowed down by reducing taxes on third tier in last fiscal year. They explained that the share of illicit cigarette could be termed as size of Rs 35 billion cost for the national exchequer and mainly influential people were part and parcel of this mafia. Despite introduction of third tier taxation, the price of branded cigarette stands at Rs 48 per packet while price of illicit tobacco packet is Rs 24 on average but the price differential should not be increased in such a way that may cause closing down of formal sector.
They said that tobacco industry had contributed Rs 110 billion in fiscal 2015-16 but with increase in tax rates, the collection nosedived to Rs 74 billion in 2016-17. In the mid of 2017-18, the FBR introduced third tier taxation system and it is now hoped that the tax collection can touch Rs 90-94 billion by end-June 2018.
Sources added that after careful deliberations in budget 2017-18, the FBR had adopted a policy stance to introduce the third slab of cigarette taxation as a way to boost revenue collection from documented sector and decrease illicit trade of non-duty paid smuggled/counterfeit cigarettes.
This third tier remained as the most effective policy measure in the tobacco industry to check sale of non-duty paid cigarettes coupled with effective enforcement.
Through Finance Act 2018, the FBR has further raised Federal Excise Duty (FED) on all three tiers of cigarettes through Finance Act, 2018.
According to the FBR's instructions to the field formations, rates of federal excise duty on different categories/tiers of locally produced cigarettes under S. Nos. 9, 10 and 10a of Table-l of First Schedule to the Federal Excise Act, 2005 were revised upwards. Through clause 9(11)(A) of the Finance Act, 2018 and the rates of FED on locally produced cigarettes have been further enhanced. Rates of FED on locally produced cigarettes notified through SRO 562(1)/2018, dated 30.04.2018 and prescribed through Finance Act, 2018 are as under:
Locally produced cigarettes if their on-pack printed retail price exceeds four thousand five hundred rupees per thousand cigarettes, the rate of FED through SRO 561(1)/2018, dated 30.04.2018, is Rs 3964/1000 cigarettes. Now, the rate of FED through Finance Act, 2018 would be Rs 3870/1000 cigarettes.
Locally produced cigarettes if their on-pack printed retail price exceeds two thousand nine hundred and twenty-five rupees per thousand cigarettes but does not exceed four thousand five hundred rupees per thousand cigarettes, the rate of FED through SRO 561(1)/2018, dated 30.04.2018 is Rs 1770/1000 cigarettes. Now, the rate of FED through Finance Act, 2018: Rs 1776/1000 cigarettes.
Locally produced cigarettes if their on-pack printed retail price does not exceed two thousand nine hundred and twenty-five rupees per thousand cigarettes, the rate of FED through SRO 561(1)/2018, dated 30.04.2018 is Rs 848/1000 cigarettes. Now, the rate of FED through Finance Act, 2018 would be Rs 854/1000 cigarettes.