In its budget preparation exercise (2018-19) regarding excisable commodities, Federal Board of Revenue (FBR) will take into account direct impact of changes in the Federal Excise Duty (FED) on cigarettes on decrease in illicit trade of non-duty-paid cigarettes during 2017-18.
Sources told Business Recorder that the budget makers have begun analyzing the indirect taxes regime on various commodities for 2018-19. Within the excisable commodities, the major revenue spinner is cigarettes. FBR historical data revealed cigarette remained the top most revenue generating source of FED and it alone contributed around 43 percent to the collection of FED. Other major excisable items remained services (international air travel), beverages, cement, natural gas and edible oils etc.
The FBR has acknowledged the fact there is a decrease in illicit trade of cigarettes due to enforcement action of Inland Revenue (IR) Enforcement Network on illicit tobacco/cigarette trade and third tier/slab (FED) on cigarettes, making duty structure under three tiers.
The FBR intended to reduce tax rates in budget 2018-18 with revenue implications of big policy measures such as possible relief for stock market and may also consider withdrawal of super tax/tax on bonus shares and regulatory duty on a list of items in budget for next fiscal year. Budget makers hinted there would be no major change in sales tax zero-rating regime for five export-oriented sectors and zero-rating regime would continue. Therefore, relief measures to be announced in budget, would have serious revenue implications for 2018-19. On the other hand, indirect taxes would continue to contribute in revenue generation and continuation of FED structure on the major revenue spinner such as cigarettes would compensate any shortfall in indirect taxes' collection during 2018-19.
Presently-enforced FED structure on this item and others such as beverages needs to be continued to ensure revenue generation while government is set to announce a number of tax relief measures in budget 2018-19.
The FBR's budget exercise on cigarettes would be based on comparison of FED collection from this item during 2017-18 with 2016-17 and sudden jump in FED collection after introduction of third slab of FED during the second half of 2017-18. The exercise would also take into account the drastic reduction in illicit trade of cigarettes during this period.
The budget exercise would also consider the number of smokers in the country as per health experts. At the same time, the success story of FBR's Inland Revenue Enforcement Network (IREN) through its raids against the locally-manufactured tax-evaded and counterfeit and foreign-smuggled cigarettes, also speaks itself.
Budget makers fully understand that the huge price gap between the legal and tax-evaded cigarettes is one of the key reasons of the increased demand for cheap tax-evaded cigarettes widely available across Pakistan.
According to experts, the continuation of FED structure under three tiers of cigarettes in 2018-19 would be a key factor to ensure this item as top revenue spinner in next fiscal year.
During post-third-tier situation in 2017-18, the FBR's experts found local tax-evading companies were operating at even lower prices and now with a 3rd tier, they are being forced to push their prices higher, hence, the legitimate industry can operate, now.
It was found during ongoing budget preparation exercise that the revised FED structure on this item has directly reduced the illicit trade of non-duty-paid cigarettes.
Prior to third slab of FED, the FBR has suffered revenue loss due to two-tier structure. The FBR has suffered tax revenue loss of over Rs 130 billion due to the exponential increases in non-tax-paid cigarette sales over the period of last five years.
The minimum Federal Excise Duty and Sales Tax on tier-1 cigarettes was Rs 92.99 per pack whereas for tier-2 cigarettes it was Rs 43.45 per pack. Based on this structure, cigarettes falling under tier-2 category could be sold in the price range of Rs 67 to Rs 72 per pack. The non-tax-paid local cigarettes, on the other hand, were being sold in the market at a per pack price of around Rs 30, lower than the minimum applicable amount of FED and sales tax.
According to the analysis, during 2017-18, the government realized that despite increasing FED on cigarettes, the tobacco consumption was not decreasing. The revenues were falling drastically without any positive development in reduction of consumption. The tax collection on cigarettes dropped from Rs 114 billion to Rs 83 billion in one year alone.
Over the years, the prices of tax-paid cigarettes soared by almost 150%. This increased the price differences between tax-paid and non-tax-paid cigarette brands fuelling growth in sales of non-tax-paid cigarettes. This has been reflected by the fact that in the last 5 to 6 years, the cigarette market has been stable in the country at 80 billion sticks; however, volumes were shifting to the illicit sector. Where the minimum tax per pack has been circa Rs 44, the non-tax-paid cigarettes have been sold at as low as Rs 15/pack. This drove their sales higher, taking away from the tax-paying volumes. As a result, there was no net change in the overall consumption; however, Government taxes began witnessing a decline.
In the forthcoming fiscal year (2018-19), it is expected that the FBR's policy and strategy to fight illicit cigarette trade by using excise and enforcement network (IREN) would continue because it has been working, effectively.