LAHORE - The Federal Board of Revenue has put forward a proposal to increase the excise duty on cigarettes. According to FBR sources, the proposal is expected to fetch around Rs10 billion. This estimate however, may not be realistic, considering the expected increase in illicit tobacco market.
Industry experts pointed out that this proposal is expected to further increase differential between duty-paid and illicit cigarette prices thus providing impetus to illicit tobacco market. FBR’s unilateral price hikes in previous years have resulted in similar results, with nearly 1 out of 4 cigarettes in Pakistan being duty-evaded at present
Quoting Director of Intelligence and Investigation for Inland revenue, they disclosed that tax aviation in cigarettes is mush higher than the estimated Rs 8 to 10 billion annually, the availability of illicit cigarettes is most of the 800,000 retail shops in the country is wide spread.
Upon taking a closer look it becomes, evident that tax incidents on cigarettes in Pakistan is one of the highest compared to other developing countries and much higher than countries with high illicit trade. An optimal duty structure has proven to be a key success for reducing illicit trade and enhancing, Government revenues as high taxes provide more inceptives for evasion, specially where, enforcement apparatus is less than effective.
According to the WHO’s global progress report implementation of FCTC, the global average of total tax burden (excise + other taxes) on cigarettes is 59.4pc. In Pakistan the minimum tax levied on cigarettes is 68.5pc, and I goes up to 81pc for top brands.
Any drastic tax changes will not meet the desired objectives. It only results in change of composition of supplies, for expensive duty-paid manufactures to cheep duty-evaded products.
Tax changes also do not necessarily mean increase in tax revenue, for the government. In 2009 and 2010 taxes on one category of cigarettes were increased from 57.5pc to 68.5pc. Government should consider long term strategy to tackle illicit trade of reap enforcement dividend before embarking on a project which will neither decrease smoking nor increase government revenue.
The FBR sources informed that the donors are exerting extensive pressure on the government to increase tax collection. FBR seems to resorting to squeezing the existing tax payers which will only be a short term solution.