The government move to introduce health tax through Money Bill 2019 would divert revenue from this tax to the federal consolidated fund and cannot be directly embarked for health related activities. Experts told Business Recorder that the additional taxation in the name of health tax and withdrawal of third tier (third slab of the excise duty) on cigarettes would result in massive revenue loss to the national exchequer.
In case the proposal is enforced through Finance Bill 2019-20, it would be the discretion of the Finance Ministry about the estimated allocation of funds for health activities in the country. It has been assumed by NGOs that imposition of health tax in the upcoming budget would generate additional revenue of over Rs 250 billion to the national exchequer in three years period. It is further estimated if the government eliminates the lowest tax tier and brings the FED of the lower tier to Rs40, it would raise significant additional tobacco tax revenue of Rs 18.4 billion or 20.9 percent increase from current tobacco tax revenue. These estimates have totally failed to specify the revenue loss on account of growing illicit trade of tobacco in the country.
However, tax experts have estimated massive decrease of Rs 34 billion from documented sector following imposition of the health tax levy as it would again give rise to an increase in the illicit non-tax paid cigarette trade.
At the time when the total projected revenue from document industry has been gradually increased and would touch record revenue of Rs 115 billion for 2018-19, the government move to over burden tobacco sector would reverse the situation. Instead of any increase the revenue would start declining form this sector due to the imposition of the health tax.
According to the experts, the proposal to impose 'Sin 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 Sin Tax would further encourage tax evasion at domestic stage.
The additional taxation in the name of 'Sin Tax' on tobacco industry would create serious complications for the industry at a time when companies have to pay extra Federal Excise Duty (FED) of Rs 26 billion under Finance Supplementary (Amendment) Bill, 2018.
The Finance Act 2018 had increased FED on cigarettes in all three slabs for 2018-19. The rate of duty on locally produced cigarettes was enhanced with the estimate revenue of Rs 107-108 billion in 2018-19 as compared to estimated amount of revenue of over Rs90 billion in 2017-18.
Under the Finance Supplementary (Amendment) Bill, 2018, the FBR has amended the Finance Act 2018 to again increase taxes on tobacco sector for the same fiscal year. The FBR has increased FED on all three tiers of cigarettes. Under the revised structure of the FED on cigarettes, the rate of FED has been increased from Rs 3,970 per 1,000 cigarettes to Rs4,500 per 1,000 cigarettes under tier-1.
Under tier-2, the rate of FED has been increased from Rs 1,776 per 1,000 cigarettes to Rs 1,840 per 1,000 cigarettes. Under Tier-3, the rate of FED has been increased from Rs854 per 1,000 cigarettes to Rs 1,250 per 1,000 cigarettes.
Under the changes in tobacco sector, the government has enhanced FED on un-manufactured tobacco produced by Green Leaf Threshing (GLT) units from Rs 10 per kg to Rs 300 per kg. The FED on tobacco is adjustable against FED on cigarettes; additional revenue will come through better enforcement on limited number of GLT units.
The FBR has already introduced third tier (third slab of excise duty) on cigarettes. Proposal of another form of additional taxation under the cover of Sin Tax is under consideration of the health ministry. This proposed Sin Tax would be considered as a new form of excise, besides three slabs of FED on cigarettes.
The accumulative effect of the additional taxation on tobacco industry through Finance Act 2018 and Finance Supplementary (Amendment) Bill, 2018 is over Rs 100 billion for 2018-19. At the same time, proposed 'Sin Tax' on tobacco industry would result in production of local tax-evaded cigarettes and increase in tax evasion in tobacco sector.
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 'Sin Tax', sources said.
As the tobacco sector is already subjected to higher rates of Federal Excise Duty, the additional taxation of Rs 10 per 20 cigarette sticks would result in production of local 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 illicit sector may again increase in case any move is made to increase further taxation under different names.