Tobacco in the budget

Amid reports of rising illicit cigarette sales, the federal government seems to have put forward a new strategy. Instead of simply raising the punitive federal excise duty on cigarette sales, the recent federal budget announced a new FED structure, besides a few measures to check illicit trade. Let's evaluate what these proposals might hold for tobacco intake in the country.

The background is that formal sector sales have been declining lately, mostly on account of growth in undocumented, non-duty-paid (DNP) cigarettes roaming the low-end of the market. (For more on that, read "On taxing tobacco" published in this column May 25). Industry majors suggest that more than forty percent of cigarettes sold domestically are DNP. They cite FED-driven price increases as undercutting their legit operations.

The FY17 tariff was such that cigarette packs with retail price below Rs88 were charged an FED of Rs33 per pack, whereas packs selling above that tab carried Rs74 FED per pack. Now in the new budget, a three-tier FED regime has brought back in place. From July onwards, cigarette packs selling above a retail price of Rs90 will carry an FED of Rs74.8; packs selling between Rs90 and Rs58.5 will carry an FED of Rs33.4; and packs retailing below Rs58.5 will carry an FED of 16 per pack.

It is clear that the new regime has an FED increase on top two slabs that is really minimal for consumers to even take notice in the end. This might help the formal sector maintain the status quo on pricing in their fight against DNP cigarettes. But this alone does not help them retake their market share.

The introduction of the third tier (retail price below Rs58.5) may cut two ways. On paper, it should help convince informal manufacturers to stop evading the duties, for soon the minimum FED will be Rs16 per pack instead of Rs33. But realistic chances are low. On the contrary, there is a risk that the bottom tier will incentivise top players to introduce cheaper brands in the formal market. That would be a setback, given the potential for young people finding an entry point via low-priced, widely-available cigarette brands.

Another tax measure has been proposed to get a better handle on sale/purchase of tobacco raw material. The finance bill FY18 directs that "Pakistan Tobacco Board, at the time of collecting cess on tobacco, directly or indirectly, shall collect advance tax at the rate of five percent of the purchase value of tobacco from every person purchasing tobacco including manufacturers of cigarettes.," This WHT, which is adjustable, has not reportedly been welcomed by formal manufacturers.

Then, there are some penal measures announced for folks dealing in aspects of DNP and counterfeit cigarettes, including those "manufacturing, possessing, transporting, distributing, storing, selling" them. Besides, anyone "who manufactures, possesses, transports, distributes, stores or sells cigarette packs without, or with counterfeited, tax stamps, banderoles, stickers, labels or barcodes" would also be brought to book.

Proposed penalties for such activities include "twenty-five thousand rupees or one hundred per cent of the amount of tax involved, whichever is higher"; a prison term up to five years and/or a fine extending to the tax loss; permanent seizure of vehicles used for such transport; and premises being sealed for up to 15 days in case of repeat offense.

Will the new FED structure and penalties arrest the low-priced DNP cigarettes running amok? It isn't clear. Also unclear is whether the government is giving serious thought to the idea of using tax stamps on cigarette packs to counter illicit trade. Marginal rise in FED and introduction of third tier would help the formal sector, but without effective crackdown on informal sector, uncertainty would remain. In the meantime, one way or the other, avenues for tobacco intake would remain accessible and affordable.