NA body on Agri Products meets today for getting briefing on tobacco taxation

ISLAMABAD: Amid tobacco’s giant companies proposed an increase in advance adjustable withholding tax on un-manufactured tobacco at Green Leaf Threshing (GLT) processing stage from Rs10 per kg to Rs500 per kg in the next budget for 2020-21, the National Assembly’s sub-committee on special agriculture products is going to meet today (Tuesday) for getting briefing on tobacco taxation.

The advance withholding tax on un-manufactured tobacco, imposed in the last budget, was reduced from Rs300 per kg to just Rs10 per kg at GLT stage in the name of growers due to some lobbying. This advance withholding tax was decreased to allegedly benefit illicit manufacturers of cigarettes industry mainly located in Mardan and some parts of AJK.

According to notice issued by National Assembly Secretariat, 10th meeting of the sub-committee of the special committee on Agriculture products will be held on June 2, 2020 at Parliament House Islamabad to discuss briefing on current tobacco taxation regime and disaggregated on revenue collected from tobacco sector in last five years and proposal for improving tax collection from tobacco industry.

Despite 93% increase in Federal Excise Duty (FED) rates in 8 month from October 2018 to July 2019, tobacco revenue collected by FBR in the FY 2019/20 would be less that the revenue collected in FY 2018-19.

With such major increases in taxes, one would expect government revenues to be increased, however, there exists a large tax evading, Duty Not Paid sector that is using these tax increases to its advantage.

In the last Federal Budget 2019-20, announced on 11 June 2019 by then Minister of

State for Revenue Hammad Azhar, the government had forecasted an increase in taxes from the tobacco industry, from Rs124 billion to Rs147 billion. With 93% increase in the last 8 months only in Tier II brands and a 30% increase in the excise of Tier I brands.

With every successive excise increases, the price differential between Duty Not Paid and tax paying brands continued to widen resulting in shift of consumption to cheaper tax evaded products. Currently, there is a difference of almost Rs40 between the price of tax evading and tax paying cigarette brands.

This huge price difference, and blatant violation of the laws, results in consumers continuing to down trade and buy cheaply availably duty not paid brands.

Therefore, despite radical and never witnessed before increases in excise rates, government revenues are still expected to fall short of the forecast of Rs147 billion and in fact decline even lower than what was generated last year, Rs124 billion.

Sources in FBR have confirmed that two large manufacturers who contribute 98% of the total tobacco revenue has presented a proposal to FBR which will increase revenue from existing Rs116 billion in the current fiscal year to Rs140 billion in the next fiscal year.

If completely eradicated Non Duty Paid cigarettes, the government would be able to generate an additional Rs77 billion (estimated) in taxes each year.

This is the potential of finishing duty not paid cigarettes, if they are dealt with effectively by the tax authorities in collaboration with other law enforcing agencies at federal and provincial levels.

According to experts, 98% of government revenue contribution is from the tax paying industry and the Duty Not Paid industry that has close to 38% market share only contributes 2% of the total government revenues.

In the FY 2019-20 budget, the advance adjustable tax to be paid by manufacturers was reduced, the task forces to be set up for enforcement against tax evading cigarettes were not set up and finally, the much awaited, implementation of a Track & Trace system now seems to be in a spiral.

Regarding the adjustable advance Federal Excise Duty (FED), in what seemed to be an unprecedented move last year, the government decided to reduce this back to Rs10/kg from Rs300/kg applicable on tobacco that had just been increased the year before.

To reduce Duty Not Paid cigarette market by plugging leakages and stop revenue losses, FBR introduced a Rs300/kg adjustable advance tax (First Schedule, Table I,

Serial No 7 of the Federal Excise Act 2005) applicable on processed tobacco that comes out of Green Leaf Threshing (GLT) plants of cigarette manufacturing units, that also process leaf for cigarette manufacturers who do not have GLT plants.