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Realisation of taxes from tobacco and cigarettes

Tobacco is a crop that possesses numerous aspects. Not only does it involve scientific treatment, but requires special attention by the producers during the growth, curing and marketing stages. This crop possesses immense economic significance and its impact on the fiscal and monetary policies of major producing, exporting/importing countries is quite pronounced.

In Pakistan, although tobacco cultivation occupies a relatively small area of 0.27% of the total irrigated land in the country and about 3% in Khyber Pakhtunkhwa (KPK), it is of great economic value as a source of revenue, employment and foreign exchange earnings to the country.

During 2009-2010, a sum of about Rs 44.62 billion was contributed to the Federal Exchequer as Federal Excise Duty and Sales Tax. Being a highly labour-intensive crop, about 80 thousand persons are involved in its cultivation, fifty thousand are engaged in cigarette factories of the Tobacco Industry and another one million find indirect employment. It is also an important source of foreign exchange earnings for the country (Pak Rs 1241.711 million during 2009-2010). Had the production of tobacco crop not been developed by the Pakistan Tobacco Board on scientific lines, the country would have been importing raw material worth Rs 9 to 10 billion per annum.

Prior to 1968, tobacco was cultivated in Pakistan, but its importance in the agriculture sector was insignificant due to inferior quality, low yield and inadequate return. The tobacco industry was then dependent on imported raw material on which a huge amount of foreign exchange was spent every year. In 1968, the Government of Pakistan decided to promote the cultivation, manufacture and export of tobacco and tobacco products on an organised basis. The Pakistan Tobacco Board was established in 1968 for the promotion of the cultivation, manufacture and export of tobacco and tobacco products and for matters, ancillary thereto.

Levy of Federal Excise Duty/Sales Tax The Federal Excise Duty and Sales Tax on Tobacco and Cigarettes are realised by the Federal Government under the Federal Excise Act, 2005 and rules made thereunder. Followings are the rates of Federal Excise Duty and Sales Tax on Tobacco and Cigarettes:

From the above, it is evident that upto 81% of the total sale proceeds of cigarettes are realised by the Federal Government in the form of Federal Excise Duty/Sales Tax, besides other taxes in the form of Custom Duty and Income Tax. Following statement depicts the position of the Federal Excise Duty/Sales Tax realisation of the Federal Government during the last five years:


Types of tobaccos grown in Pakistan

Pakistan is endowed with various types of terrains and temperatures. The historic Indus valley basin with two mighty dams-one at Mangla in Punjab Jehlum and another at Tarbela in Khyber Pakhtunkhwa in the northern part of Pakistan is not only famous for its scenic beauty, but is also an agriculturally developed region producing Pakistan's finest tobaccos. With a history of about four hundred years of tobacco production, the growers have attained a high degree of proficiency in producing both Virginia and Rustica types of tobaccos. The following types of tobacco are produced in Pakistan:-

Area under different types of tobaccos grown in Pakistan (Hectares) Following statement depicts position of area under different types of tobaccos grown in the country during the years 2004-05 to 2008-09: Production of different types of tobaccos in Pakistan (Million Kgs)

Following statement shows position of production of different types of tobaccos in the country during the years 2004-05 to 2008-09: It will be observed from the above statements that the major share of cigarettes type tobaccos (about 98%) consumed in the manufacture of cigarettes in the country is produced by KPK.

Under the National Finance Commission Award 1996, Federal Excise Duty/ Sales Tax on tobacco and cigarettes realised by the Federal Government have been placed in the Divisible Pool. The National Finance Commission Award is formulated in consultation with the Provincial Governments. It may, however, be clarified that:

I) Tobacco is cultivated all over the country, although most of it is frown in kpk and Punjab;

ii) cigarette manufacturing factories are scattered through-out the country; and

iii) cigarettes on which the Federal Excise Duty and Sales Tax are leviable, are consumed/ smoked in all parts of the country.

(The writer is former secretary, Pakistan Tobacco)

Copyright Reuters, 2012


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