Tax slab on cigarettes helps to boost revenue collection in fiscal year 2017-18

Data from Federal Board of Revenue (FBR) shows that third tier tax slab on cigarettes has remarkably helped to boost revenue collection in fiscal year 2017-18 compared to last year, which could improve further if a proposed audit of tobacco industry is extended to retailers to check effective enforcement of the stipulated minimum price law. 

After careful policy deliberations, the federal government had introduced third tier tax slab on cigarettes in budget 2017-18, with the aim to halt an 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 FBR data, before the introduction of the third tier tax slab, revenue from tobacco industry declined from Rs 114.19 billion in 2015-16 to Rs 83.69 billion in 2016-17 due to an increase in illicit trade of cigarettes. In the outgoing fiscal year 2017-18, the FBR is eying to collect more than Rs 90 billion in the form of revenues.

Prior to the introduction of third tier tax slab, it has been estimated that national exchequer had suffered tax revenue loss of over Rs130 billion during a period of five years due to the exponential increases in non-tax paid cigarette sales.

Experts believe that the government should be lauded for showing consistency in its fiscal policy by deciding to retain third tier in the recently announced budget 2018-19 as it has allowed the tobacco revenues to resume an upward trajectory. According to sources, if third tier tax slab had not been introduced last year, the share of illicit cigarette component would have risen as high as 50 percent, with revenues dropping drastically to as low as Rs 60 billion. This consistency in policy would allow FBR to bring more illicit volume in the tax net and boost 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 the introduction of third tier tax slab along with strong action taken by FBR’s Inland Revenue Enforcement Network (IREN) against illicit tobacco trade. In 2017, the IREN stepped up its enforcement drive to raid several illegal warehouses and factories, and make seizures equivalent to 1.6 billion sticks of 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, where open violation of the minimum price law can be seen.

While all local cigarette manufacturers seemingly comply with pack regulations and 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. This perception is contradicted by the stern enforcement action taken by FBR units. 

The only way to validate if the due tax has been paid or not on a pack is to conduct a test purchase or specifically ask a retailer the price of these illicit brands, manufactured mainly in Mardan and Azad Jammu & Kashmir (AJ&K). More than 85% of illicit trade in Pakistan stems from illicit manufacturers in Mardan and AJ&K.

The wide price gap between legal and tax evaded cigarettes is the key driver of demand for cheap, illicit cigarettes that are widely available across the country. The real issue remains enforcement of the minimum price law and practicable steps need to be taken to address this situation.

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