The cigarette manufacturing companies would also be required to bear the cost of Trace and Track System of the Federal Board of Revenue (FBR), when made applicable.
Under the Finance Supplementary (Amendment) Bill, 2018, the FBR has amended the Finance Act 2018 to again increase taxes on tobacco sector for the same fiscal year. The FBR has increased FED on all three tiers of cigarettes. Under the revised structure of the FED on cigarettes, the rate of FED has been increased from Rs 3,970 per 1000 cigarettes to Rs 4,500 per 1000 cigarettes under tier-1.
Under tier-2, the rate of FED has been increased from Rs 1,776 per 1000 cigarettes to Rs 1,840 per 1000 cigarettes. Under Tier-3, the rate of FED has been increased from Rs 854 per 1000 cigarettes to Rs 1,250 per 1000 cigarettes.
The impact on price per 20-pack of cigarettes will be Rs 12.5 (Tier I) and Rs 11 (Tier III). For Tier-2, the impact would be around 7 paisas only. However, the impact on Tier III is more as enhancement in duty is more because of low existing rates.
Under the changes in tobacco sector, the government has enhanced FED on un-manufactured tobacco produced by Green Leaf Threshing (GLT) units from Rs 10 per kg to Rs 300 per kg. The FED on tobacco is adjustable against FED on cigarettes; Additional revenue will come through better enforcement on limited number of GLT units.
The FBR has already introduced third tier (third slab of excise duty) on cigarettes. Another form of additional taxation under the cover of Sin Tax is under consideration of the government. This proposed Sin Tax would be considered as a new form of excise besides three slabs of FED on cigarettes.
The accumulative effect of the additional taxation on tobacco industry through Finance Act 2017 and Finance Supplementary (Amendment) Bill, 2018 is over Rs 100 billion for 2018-19. At the same time, proposed 'Sin Tax' on tobacco industry would result in production of local tax-evaded cigarettes and increase in tax evasion in tobacco sector. Therefore, it would be the third budget for the tobacco industry for the same fiscal, i.e, 2018-19.
Tax experts have apprehended that there is a very high risk of increase in production of local tax-evaded cigarettes in the country as a result of extra taxation of the tobacco sector in the name of 'Sin Tax', sources said.
As the tobacco sector is already subjected to higher rates of Federal Excise Duty, the additional taxation of Rs 10 per 20 cigarette sticks would result in production of local tax evaded cigarettes. Secondly, tax expert said that the incentive of tax evasion would also increase due to proposed higher taxation of cigarettes. Thirdly, there are apprehensions that the share of illicit sector may again increase in case any move is made to increase further taxation under different names.
In 2017, the FBR stepped up its enforcement drive by constituting the Inland Revenue Enforcement Network (IREN) to check production of counterfeit cigarettes and interception of non-duty paid cigarette sticks and raw materials of these non-compliant manufacturers. The introduction of third tier and its effective enforcement and extensive monitoring has reduced illicit trade to 34% however, sustainability of measures and their intent is crucial.
Tobacco control advocates claim that higher taxation would reduce 0.65 million premature deaths caused by smoking, besides preventing 2.55 million youth from taking up smoking. With reducing disposable household income in the country and excessive increases in legal cigarette prices, smokers have merely shifted their consumption from tax paid cigarettes to cheap, readily available tax evaded cigarettes due to weak law enforcement in Mardan and Azad Jammu & Kashmir (AJ&K), experts said.