In the recent budget, government increased the FED rates for Tier 2 brands by Rs 3,000 per 1000 sticks to Rs 5,050 and by Rs 10,000 per thousand sticks for Tier I brands to Rs16,500. This has resulted in an increase of 146% to 154% respectively. The retail price threshold, however, was increased from Rs6,660 to Rs9,000 per thousand sticks – a 35% increase only. If cigarette prices cross Rs. 9,000 per 1000 sticks, it will attract a Rs16,500 rate and lower will fall in the Tier 2 rates.
In a media briefing session by Pakistan Tobacco company Limited, the officials stated that according to calculations, if 30% of Tier II volumes start selling at minimum legal price, then just the loss of sales tax revenue to the government will be Rs. 19 billion. This is because the minimum legal price has not increased in line with past practice.
Historically, the Retail Price Threshold (RPT) used to move in line with the increase in Tier-1 FED but this time there is a deviation from the past precedent and not increasing the RPT systematically will have multiple negative implications. The Minimum Legal Price (MLP) of a law is set at 45% of the Retail Price Threshold, now increased to 60%. Unfortunately because the Retail Price Threshold did not increase as per past precedent, there was negligible increase in the minimum legal price (MLP). Currently the MLP stands at R. 108. This means the lowest price of any packet of cigarettes as per law is Rs.108.
As expensive cigarettes become even more expensive, cheaper cigarettes continue to remain cheap as the floor, the minimum price of a packet of cigarettes has not increased in line with the Tier 1 increase, with the MLP the 45% of the Retail Price Threshold.
PTC requested that the retail price threshold should increase in line with the increase in Tier 1 rates so that the minimum legal price in the country comes up and criticism that Pakistan has the lowest-priced cigarettes, stops. It is perceived that Pakistan has one of the lowest weighted average cigarette prices in the world. This is because more than 1/3rd of the market is illegal and sells below the minimum price and tax applicable per packet of cigarettes.
According to PTC officials, this will not only severely impact the sustainability of legitimate businesses but will also impact exports, foreign direct investment, employment etc.
PTC Officials believe that a rational tax increase with corresponding Retail Price Threshold and consequently Minimum Legal Price increase coupled with stringent actions against illicit cigarette trade and across the board implementation of track and trace system will help government generate more revenue from the industry.