Pakistan: Proposal to Increase Tobacco Taxation

Source from:  Daily Times  06/08/2013

A proposal to increase tobacco taxation incidence by 13.5 percent in federal excise duty (FED) on the premium brand segments and 15 percent FED increase in the value brand segment and make it fully specific is finding traction with the officials at Federal Board of Revenue (FBR) and most economic experts.

The proposed increases are well above the current inflation rate in the country and the proposal is closer to the ideal world wide best practices in taxation regimes, which should be predictable, stable, transparent and financially attractive for both the tax collector and the industry.

The FBR while discussing a number of proposals for revised federal excise duty (FED) structure for locally manufactured cigarettes has reached a conclusion that any ad valorem based excise duty structure would be regressive and counterproductive, sources in FBR said.

Proposal to make fully specific taxation regime for FED on tobacco was included in the draft of tax laws amendments Ordinance (2103) after approval of the Federal Ministry of Finance.

The ordinance was however returned by the president of Pakistan with the advice it should be part of the Finance Bill to be considered by the National Assembly this month

The proposed system also provides a mechanism for gradual increase in revenue for the government under the said proposal and will help the government plan its FED collection in advance.

The proposal projects that not only this year the FED collection will increase by more than 11 percent but will also continue to increase progressively.

The volume based proposal stipulated the rate of the FED would be Rs 2,325 per thousand cigarettes as opposed to the current Rs 2,045 per thousand sticks for the premium tier Rs 880 per thousand sticks for the value brand tier instead of current Rs 762 per thousand stick.

Tax experts believe that FED on pricing of cigarettes rather than volume will be continuation of a complex system. In this case government will have to intervene in the market to enforce pricing to ensure revenue.

Price dependent system in the past has also encouraged some small manufacturers to sell their cigarettes at artificially low retail price. Government has already introduced lowest pricing benchmarks for different tiers of tobacco market.

The new proposed taxation should be easily forecasted and simple to administer, otherwise it would lead to cheaply illicit cigarettes in the market-sizable decrease in the revenue of the FBR and a serious blow to the local manufacturers as well.

Introduction of reforms in the existing system of excise taxation based on volume will not only simplify the whole process of taxation but also eliminate the dependence on the manufacturer's pricing decision as well. It will help secure the long term tax base through more predicable revenue growth.

World Health Organisation in its various reports for has suggested an effective excise taxation regime on tobacco is the one where an excise tax of a specific amount is levied on a given quantity of tobacco such as a cartoon or a pack.

Such fully specific systems are not only supported by WHO and IMF but have already shown better collection results in many developing countries. There are already many Asian markets with like Australia, Japan, Philippines and Malaysia that have successfully adopted fully specific duty structure for tobacco excise duty.

Pakistan has a very high volume of illicit tobacco market and sudden increase in excise duty incidence can lead to increase in the illicit trade of the cigarettes in the market. Enditem