Tobacco sector: Proposed ‘sin tax’ will increase tax evasion

The proposed ‘Sin Tax’ on tobacco industry would result in production of local tax-evaded cigarettes and increase in tax evasion in tobacco sector. Sources told Business Recorder here on Wednesday that the Ministry of Health has moved a summary to the Economic Coordination Committee (ECC) to the Cabinet to impose ‘Sin Tax’ on tobacco industry.

Tax experts have apprehended that there is a very high risk of increase in production of local tax-evaded cigarettes in the country as a result of extra taxation of the tobacco sector in the name of ‘Sin Tax’, sources said.

As the tobacco sector is already subjected to higher rates of Federal Excise Duty, the additional taxation of Rs 10 per 20 cigarette sticks would result in production of local tax evaded cigarettes.

Secondly, tax expert said that the incentive of tax evasion would also increase due to proposed higher taxation of cigarettes.

Thirdly, there are apprehensions that the share of illicit sector may again increase in case any move is made to increase further taxation under different names.

In 2017, the FBR stepped up its enforcement drive by constituting the Inland Revenue Enforcement Network (IREN) to check production of counterfeit cigarettes and interception of non-duty paid cigarette sticks and raw materials of these non-compliant manufacturers. The introduction of third tier and its effective enforcement and extensive monitoring has reduced illicit to 34% however, sustainability of measures and their intent is crucial.

The question arises whether the proposed Sin Tax would result in increase or decrease of illicit trade in Pakistan, experts said.

It has been reported that the FBR’s intensive enforcement drive and implementation of three-tier taxation has ultimately forced major cigarette manufacturers in Khyber Pakhtunkhwa (KPK) to either halt production or shift their businesses to AJ&K.

Before the introduction of third tier, persistent increases in federal excise duty (FED) for tobacco industry counterproductively boosted the undocumented tobacco sector. The government revenues had recorded an increase up to financial year 2015-16 (Rs 114.19 billion) before registering a sharp decline for the first time in many years in 2016-17 (Rs 83.69 billion). This dip in revenue collection was caused by growth in demand of illicit market of cigarettes in Pakistan to about 40% of total demand, they said.

Tobacco control advocates claim that higher taxation would reduce 0.65 million premature deaths caused by smoking besides preventing 2.55 million youth from taking up smoking. With reducing disposable household income in the country and excessive increases in legal cigarette prices, smokers have merely shifted their consumption from tax paid cigarettes to cheap, readily available tax evaded cigarettes due to weak law enforcement in Mardan and Azad Jammu & Kashmir (AJ&K), experts said.

Based on tobacco consumption in Pakistan, the total market size can be calculated to be around 80 billion sticks. While the legal industry accounts for about 50 billion sticks of cigarette production, it poses the big question as to who are the other unregistered manufacturers meeting the remaining demand of 30 to 35 billion sticks? This high volume cannot be produced by manufacturers in AJ&K alone and, therefore, it shows that several illicit manufacturers are still operating in KPK region.

The FBR is committed to wipe out the local tax evading sector and further bolster its enforcement drive in AJ&K as well. In a landmark decision last year, the Lahore High Court (LHC) dismissed a petition of cigarette manufacturers/distributors of AJ&K against the seizures by FBR’s IREN wing.