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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: Table-II

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Year               Federal Excise
                   Duty/Sales Tax
               Realisation by the
               Federal Government
                     (Million Rs)
2005-06                  28855.70
2006-07                  33991.63
2007-08                  36380.30
2008-09                  46468.00
2009-10                  44618.20
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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.

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                                                  Table-I
S.No         Description of Goods                       Rate of Duty
A. Federal Excise Duty
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I.           Unmanufactured tobacco                     Ten rupee per kilogram
II.          Cigars, cheroots, cigarillos               Sixty five percent of retail
             and cigarettes, of tobacco or of           price
             Tobacco substitutes
III.         Locally produced cigarettes if             Sixty five percent of the retail
             their retail price exceeds twenty one      price
             rupees per ten cigarettes
IV.          Locally produced cigarettes if             Six rupees and four paisa per
             their retail price exceeds eleven          ten cigarettes plus seventy
             rupees and fifty paisa per ten             percent per incremental rupee
             cigarettes but does not exceed twenty      or part thereof.
             -one rupees per ten cigarettes.
V.           Locally produced cigarettes if their       Six rupees and four paisa per
 retail price does not exceed eleven        ten cigarettes.
 rupees and fifty paisa per ten cigarettes.
VI.         Cigarettes manufactured by a                Sixty five percent of retail
            manufacturer who remains engaged            price.
                                                  on and after the 10th June 1994, either
                                               directly or through any other arrangement,
                                                       if the manufacture of any brand of
                                                       cigarette in the non-tariff areas.
B.          Sales Tax @ 16% on cigarette sales.
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                                            Table-III
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Type of tobacco       Popular name                    Area where grown                       Usage
Flue-cured            Virginia                        K.P.K                             Cigarettes
Light air-cured       Burley    Swat (K.P.K)          Cigarettes
Light sun-cured       Hookah Tobacco (Hubble-bubble)  Punjab                Hookah (Hubble-bubble)
Dark air-cured        Dark air-cured                  Punjab                            Cigarettes
Sun-cured (Semi-
oriental)             White Patta (Rustica)           K.P.K            Chewing, Hookah, Cigarettes
Dark sun-cured        Naswari (Snuff)                 K.P.K,           Punjab, Balochistan, Sindh.
                                                                                             Snuff
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                                                       Table-IV                                 Area: Hectares
Year         Flu-cured        Dark air-        White Patta      Burley      Others (Punjab,     Total
             virginia         cured            (Punjab)        (K.P.K)      Sindh,
             (K.P.K)          (Punjab)         (K.P.K)                      Balochistan)
2004-05      26312            367              4929             943         17977              50528
2005-06      29227            535              6593             637         19368              56360
2006-07      25066            234              5266             446         19894              50861
2007-08      25808            301              6724             183         18382              51398
2008-09      26298            420              4818             -           18140              49676
Average      26542            371              5666             552         18752              51764
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                                      Table-V                             Production:  Million Kgs
Year       Flu-cured        Dark air-      White Patta      Burley        Others      Total
           virginia         cured         (K.P.K)         (K.P.K)      (Punjab,
           (K.P.K)          (Punjab)                                          Sindh,
                                                                              Balochistan)
2004-05    65.78            0.86            9.9                1.64           22.26         100.46
2005-06    73.75            1.6             13.2               0.92           23.12         112.59
2006-07    65.75            0.8             11.62              0.8            24.27         103.24
2007-08    69.54            0.96            14.98              0.35           21.92         107.76
2008-09    71.02            1.42            10.73              -              21.82         104.99
Average    69.16            1.12            12.08              0.92           22.67          105.8
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(The writer is former secretary, Pakistan Tobacco)
Copyright Reuters, 2012