Federal Board of Revenue's (FBR) third tier tax slab, being introduced in federal budget 2017-18, has greatly helped in curbing the illicit cigarette trade in addition to boosting revenue collection from documented sector, says tax expert. At the end of the year 2016, the market shares of illegal cigarette trade in Pakistan stood at around 40% in Pakistan. It has been estimated that national exchequer had suffered tax revenue loss of over Rs 130 billion due to the exponential increases in non-tax paid cigarette sales over the course of last five years.
The demand for illicit cigarettes was being driven by a huge price gap between the legal industry and tax evading packs that sold at much lower prices. As a result, the consumers started to shift from legitimate brands to non-tax paying brands. Therefore, despite increasing the duties on cigarettes, the government realized that tobacco consumption was not decreasing in Pakistan. In this context, the FBR had adopted a policy stance to introduce the third slab of cigarette taxation to take on illicit cigarette market and promote documented tobacco economy. Even though the decision drew criticism from certain quarters who accused the government of granting relief to the stakeholders in tobacco sector, the ground realities have proved to be otherwise.
A Senate panel has recently concluded that the introduction of third tier was intended to curb illicit trade and it was not a violation of any international commitments.
FBR's data shows that before the introduction of the third slab, revenue from tobacco industry stood at Rs 88.40 billion in financial year 2013-14, Rs 102.88 billion in 2014-15, Rs 114.19 billion in 2015-16 and Rs 83.69 billion in 2016-17. So far, any accurate or estimated figure for revenues in the outgoing fiscal year is not available the payment of Federal Excise Duty (FED) by two major tobacco brands is expected to visibly boost the revenues.
According to FBR sources, the third tier has helped in increasing the prices of non-tax paid illegal cigarettes, forcing them to come in the tax net. "Ever since the legitimate industry has been allowed to operate in the third tier, revenues are expectedly on an upward trajectory," the sources commented. Also, the FBR set up Inland Revenue Enforcement Network (IREN) to launch a blanket crackdown against the tax evaders, cigarette smugglers and counterfeit cigarettes, which is said to have saved billions of the rupees of the national kitty annually lost to pervasive tobacco black market.
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