FED collection through cigarettes declines sharply

Federal Excise Duty (FED) collection on cigarettes sharply declined by over 45 percent or Rs 4 billion during the first quarter (July-Sep) of this fiscal year 2016-17 mainly due to change in duty structure. According to State Bank of Pakistan (SBP), the tobacco industry in the formal sector is facing immense competitive pressure due to massive increase in FED and the illicit market of cigarettes in Pakistan has reached about 40 percent of the total demand.
Cigarette industry witnessed a substantial increase in FED in the fiscal budget, which not only adversely affected production, but also encouraged demand for smuggled and counterfeits in the market. The presence of a large, informal sector undermines the viability of the legitimate players in the industry and that remains one of the major factors in discouraging both domestic and foreign investment.
While highlighting the "challenge for legitimate cigarettes industry in Pakistan" the SBP in its report pointed out that the tobacco industry in the formal sector is facing immense competitive pressure due to exponential growth of duty-evaded segment. Specifically, the price increase due to higher FED in the Federal Budget FY-2016-17 and those cigarettes, which have successfully evaded excise levy, are far cheaper and thus more in demand compared to the tax-paid brands.
Under S.R.O. 473(I)/2016, the government has enhanced the FED on cigarettes in two stages. During the first stage up to November 30, 2016, the excise duty was fixed at Rs 4,000 per thousand cigarettes. This rate increased further to Rs 4,400 in the second phase starting from December 1, 2016.
As a result, not only the sale volumes of the legitimate and tax-paying segment of the industry are facing a decline, the government is also losing its revenues. FED collection on cigarettes fell to Rs 5.5 billion in first quarters of current financial year from Rs 10.1 billion in first quarters of last fiscal year, posting a decline of 45 percent or Rs 4.6 billion, the SBP reported.
According to the SBP, the tax evasion on cigarettes generally takes mainly in three forms. Firstly, on import for the commercial use (also known as International Transient Brands) on which applicable taxes include duties, excise and sales tax.