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ISLAMABAD: The National Health Ministry's new move to impose health tax on tobacco products and beverages would result in a Constitutional controversy as health is a provincial subject and the federation cannot levy health tax on tobacco consumption.

Sources told Business Recorder that the Federal Board of Revenue (FBR) has already declared Health Tax as illegal and clarified the constitution position of the issue. The FBR had clarified that health is a provincial subject and federation cannot levy health tax on tobacco consumption. Therefore, the issue of Health levy on tobacco consumption stands resolved. The legal and constitutional experts hold the view that health is a provincial subject and federation cannot levy health tax on tobacco consumption. As a result it was decided to enhance the federal excise duty on cigarettes in order to discourage smoking.

The Parliament through Finance Act 2019 abolished three tiered tax structure on cigarettes and also enhanced the FED significantly. In the Budget Speech 2019-20, the then revenue minister clarified that federal share of Federal Excise & Duty realized from tobacco sector will be preferably allocated to Ministry of National Health Services Regulations and Coordination. Resultantly issue of Health levy stands resolved.

On May 28, 2019, the federal cabinet had approved measures to prevent illicit trade of tobacco and impose 'Health Tax' on tobacco and carbonated drinks. The federal cabinet also decided that revenue generated through this health tax would be earmarked for the health sector development over and above its routine budgetary allocation. However, later the decision was not implemented due to constitutional issues. Now the Health Ministry is in the process of seeking data from the FBR pertaining to the additional revenue on account of the FED increased on cigarettes and carbonated drinks and imposition of the FED on sugar drinks during 2019-20.

Experts told Business Recorder that the additional taxation in the name of health tax on cigarettes would result in massive revenue loss to the national exchequer. According to the experts, the proposal to impose 'Health Tax' on select sectors of cigarettes and beverages would result in litigations due to its discriminatory treatment and anti-competitive nature having implications for already heavily-taxed sectors. The component of local tax evasion on cigarettes is already very high and any move to impose Health Tax would further encourage tax evasion at domestic stage. The additional taxation in the name of 'Health Tax' on tobacco industry would create serious complications for the industry at a time when companies have to pay extra Federal Excise Duty (FED). Tax experts have apprehended that there is a very high risk of increase in production of local tax-evaded cigarettes in the country as a result of extra taxation of the tobacco sector in the name of 'Health Tax', sources said.

As the tobacco sector is already subjected to higher rates of federal excise duty, any additional taxation would result in an increase in production and sales of local evaded cigarettes. Secondly, tax expert said the incentive of tax evasion would also increase due to proposed higher taxation of cigarettes. Thirdly, there are apprehensions that the share of local tax evaded cigarette sector may again increase in case any move is made to increase further taxation under different names. Moreover, the government's tax policy to simultaneously increase Federal Excise Duty (FED) and impose Health Tax on cigarettes would increase the incidence of taxes to record level on tobacco sector, increasing smuggling as well as illicit trade of cigarettes. The experts have apprehended that the massive raise in taxes on tobacco would immediately result in increase in smuggling and business of non-duty paid cigarettes. Without realizing the fact that over-burdening any sector with additional taxation would be a disaster for that sector, the Health Ministry had proposed to impose Health Tax and additional FED on tobacco and beverages.

The documented tobacco is repeatedly urging the government to adopt a balanced fiscal approach with effective enforcement measures to curtail the sale of tax-evaded cigarettes.

Tax experts have apprehended that there is a very high risk of increase in production of local tax-evaded cigarettes in the country as a result of extra taxation of the tobacco sector in the name of 'Health Tax,' sources said.

As the tobacco sector is already subjected to higher rates of Federal Excise Duty, the additional taxation would result in increased production and sales of local tax evaded cigarettes. Secondly, tax expert said that the incentive of tax evasion would also increase due to proposed higher taxation of cigarettes. Thirdly, there are apprehensions that the share of local tax evaded sector may again increase in case any move is made to increase further taxation under different names.

Another tax expert said the major problem with the Health Tax is that the government wants to impose additional tax on food and beverage items having sugar contents. But ignoring health Tax on all food items containing sugar like bakery products, cakes, biscuits, sweets (mithai), etc, would create a serious discrimination with other products having higher sugar contents.

Copyright Business Recorder, 2020