Daily Times

The Network for Consumer Protection (TNCP) report, 2017, informs that Pakistan has one of the highest prevalence of tobacco use in the world. This is alarming while it is equally distressing that the already weak tax levying and collection system of Pakistan is being deprived of its just share by the illicit tobacco industry.

The Framework Convention on Tobacco Control (FCTC) is the first ever international treaty negotiated under the auspices of the World Health Organization (WHO) to which Pakistan has been a signatory since 2005. One of FCTC’s requirements is that Pakistan implement appropriate price and tax measures to be adopted to reduce the consumption of tobacco products. In this regard, Federal Board of Revenue (FBR) approved legislation to introduce a third taxation tier for Pakistan’s tobacco industry. This step has reportedly improved the FBR’s revenue generation from the tobacco industry.

In hopes of achieving its target revenues, the FBR has tried to draw a balance between loss of lives and revenue generation with the introduction of this third tier. Lower price coupled with a low tax and current two layered tier systems have already made cigarette prices the lowest in Pakistan among the South East Asian region. The third tier could encourage more people to use tobacco products but countries like Pakistan, which suffer from an epidemic of low revenue generation due to hindrances in tax collection, have welcomed it.

It is inspirational to note that with the introduction of the third tier, expected tax contribution will be close to Rs100 billion in the outgoing fiscal year. Thus the tobacco industry itself has proposed to the government to stick to the policy of third tier slab system for taxation purposes in the upcoming budget for 2018-19.

The third tier could encourage more people to use tobacco products but countries like Pakistan, which suffer from an epidemic of low revenue generation due to hindrances in tax collection, have welcomed it

The logic behind this proposal is that it has been adjudged that the overall tobacco industry has remained stable at the annual production of 80 billion sticks, with very minimal decline in the last five years. In the not so distant past, tax evasion by the illicit market share of the tobacco industry was an impediment in the FBR’s generation of taxes through this realm. The 2017 average illicit market share was 38.2 percent and legitimate share came to 61.8 percent. In this environment, government revenue contribution from the legitimate industry is 98 percent and from the duty-not-paid sector is 2 percent.

It is discernible that if no third tier had been introduced, then the share of trading through illicit means in the tobacco industry would have risen as high as 50 percent. Looking back, we find that the legitimate industry fell from 66.3 billion sticks in 2012/13 to 29.2 billion sticks in 2016/17 – a volume shift of 37 billion sticks to the illicit sector. After the introduction of third tier the price differential between non-duty paid brands and legitimate brands was halved from Rs 44 to Rs 22. This price differential had been increasing year on year due to excessive excise led price increases by the legitimate industry.

Critics may argue that the lower prices would attract a greater number of consumers. This observation is valid but conversely it could be argued that those craving for tobacco products, would reach out to it irrespective of the cost while the government would collect it’s just and equitable share of revenue through taxes.

The results can be gauged from the statistics that there has been an augmentation of more than 20 percent in Government revenues due to third tier taxation. Government revenue had reduced from Rs 111 billion (2015/16) to Rs 74 billion in 2016/17 (a shortfall of Rs 37 billion) and was set to dip even further, however, with the introduction of third tier and effective enforcement of this tier, Government revenue is expected to increase to more than Rs 90 billion. This increase in revenue is corroborated by a decline in illicit tobacco trade following the fiscal enforcement measures.

A number of prominent measures were adopted, which include the creation of a dedicated task force by the Inland Revenue Enforcement Network (IREN), which led to a confiscation of 1.6 billion cigarettes and raw material seized through numerous raids in 2017. The FBR simultaneously also launched a nationwide public awareness campaign.

The illicit trade’s market share had climbed as high as 41.2 percent in June 2017. A definite decline was depicted after the promulgation of the third tier. Today the illicit market share stands at 35 percent. This is because the duty-not-paid sector is coming up with innovative ways to create hindrances in enforcement of the third tier: Illicit players have started shifting their manufacturing hubs from Khyber Pakhtunkhwa (KPK) Province into Azad Jammu and Kashmir (AJ&K) and apparently have their warehousing facilities in private residences.

The writer is a retired Group Captain of PAF. He is a columnist, analyst and TV talk show host, who has authored six books on current affairs, including three on China

Published in Daily Times, April 28^th 2018.