Pakistan: Cigarette Brands: Withdrawal of Middle-tier of FED Slab Proposed

Source from:  Business Recorder  02/20/2013

Federal Board of Revenue (FBR) has proposed to withdraw middle tier of Federal Excise Duty (FED) slab on all cigarette brands, which is not only bringing negative impact on the legal tobacco trade, but also on revenue generation from cigarettes manufacturing sector.
 
The new taxation proposals are meant to generate additional revenues in the second half of current financial year - by bringing all cigarette brands falling in the middle tier to upper tier slab of duty under the Federal Excise Act - attracting 65 percent rate of duty. Consequently the price of pack of cigarette will also shoot up which will compel a larger number of people to opt for cheaper cigarettes, in cost and quality, sold illegally.
 
It is calculated that the intended proposal will increase most popular brands' retail price by 40 percent. The proposed tax increase is considered to be five times higher than the average disposable income growth for the last year. According to one estimates, if these proposals are approved and implemented, it will result into 20 percent decline in legal industry volume. Already government has been unable to recover billions of losses that illegal cigarette industry has inflicted on it.
 
The overall volume of illicit trade of cigarettes has reached 22 percent - inflicting a loss of more than 12 billion. There is a stark increase in the volume of illicit trade of cigarettes from 19 percent in 2010 to 22 percent in the current financial year. The sale of such cigarettes has also increased 65 percent. The smuggled foreign brands contribute a major share to the illicit cigarette industry. They are not only inflicting huge losses to the revenue generation but also violating fiscal and health laws. They comfortably evade multiple taxes which legitimate cigarette industry is liable to pay, such as; excise tax, customs duties and value added tax, while 1979 Ordinance compels the cigarette producers to abide by the health laws which also includes printing pictorial health warnings on the cigarette boxes. In case of violation, the accused is liable of two years of imprisonment.
 
The legal tobacco industry contributes 37 percent of the total Federal Excise Duty (FED) and 3.5 percent of the total FBR revenue. In the first three quarters of 2012 - the compliant tobacco industry contributed 48 billion rupees in various taxes to the national exchequer.
 
Massive production of counterfeit cigarettes is another form of illicit trade which poses serious dangers to health. They avoid all kinds of taxes, violate copyright laws and pose severe health risks. These are usually made in underground factories under unhygienic and dingy conditions while using contaminated tobacco leaves - with much higher level of nicotine and tar.
 
Tobacco products are one of the most heavily taxed consumer goods generating a hefty amount of revenues to the government. Unreasonable and ill-considered changes in the excise structure will take the revenue to the illicit sector, leaving the legal industry damaged. Enditem