LAHORE – In encouraging signs for Pakistan’s economy, the introduction of third tier tax slab on tobacco products and cigarettes has remarkably helped boosting revenue collection, which could improve further provided that a thorough audit of tobacco sector is carried out with its extension to retail sector for effective enforcement of minimum price law.
In the financial year 2017-18 which started on July 1 last year and ends on June 30 this year, the federal government introduced third tier tax slab on cigarettes with an aim to stem the unabated decline in government revenues due to an alarming increase of up to 40 per cent in market share of illicit cigarette component.
According to Federal Board of Revenue (FBR’s) data, before the introduction of the third tier tax slab, revenue from tobacco industry stood at Rs 88.40 billion in financial year 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 the outgoing fiscal year, the FBR is eying to collect more than Rs 90 billion in the form of revenues.
Tobacco industry experts argue, had third tier tax slab not been introduced, the share of illicit cigarette component would have risen as alarmingly high as 50 percent, with revenues dropping to as drastically low as Rs 60 billion.
The experts believe consistency is the key in the fiscal policy to improve government revenues. In addition, the FBR has acknowledged that there has been a visible decline in illicit trade of cigarettes from 40 percent to 35 per cent due to strong action taken by FBR’s Inland Revenue Enforcement Network (IREN) on illicit tobacco trade besides introducing third tier tax slab on cigarettes.
Recently, Chairman Public Accounts Committee (PAC) Syed Khursheed Shah suggested to conduct a tax audit of tobacco sector. This, according to experts, is a positive step. However, the desired results of this audit can only be achieved if it is extended to the retail sector.
While all local cigarette manufacturers print the minimum price of Rs 48 on their packs, tax evaded cigarettes are easily available at an average price of Rs 25 to Rs 30. Still, it is wrongfully assumed that all local cigarette manufacturers are tax compliant since the huge seizures equivalent to 1.6 billion sticks of cigarettes, and raids on illegal warehouses and factories by the FBR’s enforcement units contradicts this perception.
For many, wide price gap between the legal and tax evaded cigarettes is the key driver of demand for tax evaded cheap cigarettes widely available across the country and practicable steps need to be taken to address this situation.