Tobacco industry has expressed its concern over a proposal of the Federal Board of Revenue (FBR) to enhance excise duty on cigarettes and said that the Board’s move would further boost the illicit trade of cigarettes in the country. Though, the FBR estimates additional revenue amounting to Rs 10 billion on this account, yet the estimate might not be realistic if expected increase in illicit tobacco market was taken into consideration, sources told Business Recorder on Tuesday.
This proposal is expected to further increase differential between duty-paid and illicit cigarette prices thus providing impetus to illicit tobacco market. According to sources, the unilateral decisions regarding price hikes in previous years have resulted in similar results, with nearly one out of four cigarettes in Pakistan being duty-evaded at present. Tax evasion on cigarettes is much higher than the estimated revenue of Rs 8-10 billion annually, as illicit cigarettes are freely available on about 800,000 retail shops across the country.
Upon taking a closer look it becomes evident that tax incidents on cigarettes in Pakistan is one of the highest compared to other developing countries and much higher than countries with high illicit trade. An optimal duty structure has proven to be a key success for reducing illicit trade and enhancing government revenues as high taxes provide more inceptives for evasion, specially where, enforcement apparatus is less than effective.
According to the WHO’s global progress report on implementation of Framework Convention on Tobacco Control (FCTC), the global average of total tax burden including excise and other taxes on cigarettes is 59.4 percent. In Pakistan the minimum tax levied on cigarettes is 68.5 percent, and it goes up to 81 percent for top brands. Thus it was obvious, that in Pakistan, the tax on cigarettes was already much more than global average tax on cigarettes, sources said.
Any drastic tax changes (upward) will not meet the desired objectives. It has been proved again and again that increasing taxes, particularly when tax evasion is very high, does not reduce smoking. It only results in change of composition of supplies, for expensive duty-paid manufactures to cheep duty-evaded products. In short, smoking rates continued to stay intact while the share of illicit products increased as consumers switched to cheaper and duty-evaded alternatives, sources claimed.
Tax changes also do not necessarily mean increase in tax revenue for the government. In 2009 and 2010 taxes on one category of cigarettes were increased from 57.5 percent to 68.5 percent. In 2010, the government revenues generated from cigarettes industry in Pakistan actually stopped growing and there was a visible decline in revenue collection by FBR. This was result of increasing sales of cheaper tax-evaded products, sources added.
The sources were of the view that the government should consider long-term strategy to tackle illicit trade of reap enforcement dividend before embarking on a project which will neither decrease smoking nor increase government revenue. As donors are exerting extensive pressure on the government to increase tax collection, FBR seems to resorting to squeezing the existing tax payers which will only be a short term solution. It will eventually back fire leading to more tax evasion and lost in revenue. There is a need of immediate review of such proposed measures to avoid any adverse impact on tax collection. The government should focus on well thought strategy to widen the tax net and increasing the tax base rather than putting more burden existing taxpayers, sources added.
Copyright Business Recorder, 2013
