FBR’s third tax slab & enforcement drive results into positive

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ISLAMABAD: The policy decision of Federal Board of Revenue (FBR) to introduce third tax slab for cigarettes and step up its enforcement drive against non-duty paid and smuggled cigarettes has severely hurt the illicit cigarette trade in Pakistan.

At the end of the year 2016, illegal tobacco market in Pakistan had mushroomed to an estimated 40% of the total market, according to State Bank of Pakistan.

The demand for illicit cigarettes is mainly driven by the wide price gap between them and brands of the legal players. Tax evaded cigarettes are easily available at an average price of Rs 20 to Rs 25, which is significantly below the minimum selling price but there has been no action from authorities.

As a result, the revenues from documented tobacco industry reduced to Rs 83.69 billion in 2016-17 compared to Rs 114.19 billion in 2015-16 and Rs 102.88 billion in 2014-15. It has been estimated that the national exchequer had lost more than Rs130 billion over the course of last five years due to an exponential increase in non-tax paid cigarette sales.

In this context, the FBR had adopted a policy stance in budget 2017-18 to introduce the third slab of cigarette taxation as a way to boost revenue collection from documented sector and decrease illicit trade of local tax evaded and non-duty paid smuggled/counterfeit cigarettes.

According to FBR sources, the third tier has helped in increasing the prices of non-tax paid illegal cigarettes, forcing them to come in the tax net. “Ever since the legitimate industry has been allowed to operate in the third tier, revenues are expectedly on an upward trajectory,” the sources commented.

In the presence of these cheap illicit cigarettes, the government has struggled to achieve its public health objectives as smoking incidence in Pakistan has remained relatively stable. From past experience, it is evident that the government’s policy of persistent tax increases on cigarettes has failed to reduce tobacco consumption in the country. As affordability becomes an issue, consumers simply shift to these local tax evaded brands.

Taking strict notice of tax evasion in the tobacco sector, the FBR has constituted a special enforcement network titled at Inland Revenue Enforcement Network, especially to address foreign non-duty paid / counterfeit brand local manufactured non-duty paid cigarette dumping by AJK cigarette manufacturers. In 2017, an estimated 1.63 billion non-duty paid cigarette sticks and raw material of illicit sector worth billions of rupees have been seized. The unprecedented crackdown has successfully led to closure of several warehouses and factories involved in the non-duty paid cigarettes business.

Even though illicit trade has been dented by government actions, it remains a pervasive problem across the country. While the enforcement network can manage to tackle supply side of the problem, the government should show consistency in its taxation policy for cigarettes and enforcement action to ensure that the demand for illegal cigarettes is reduced. – NNI

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