Federal govt may impose ‘Sin Tax’ on Tobacco industry

Multinational companies are paying 98% taxes on 60% market share, while local registered tobacco firms paying only 2% taxes with 40% market share

KARACHI: The federal government is planning to impose another new tax ‘Sin-Tax’ on Tobacco industries before the next budget to be announced in 2019-20 and if the government successfully imposed it, the problems of the multinational cigarettes companies working in Pakistan will enhance.

Prime Minister Imran Khan in his public address on the completion of 100 days in government said, “only two tobacco companies, with a market share of around 60% contribute 98% of the tobacco tax collection, whereas all other tobacco companies operating locally contribute only 2% to the national exchequer despite having a market share of about 40%.

Only two multinational companies (Foreign Companies) contributed Rs 89 billion in excise duties and taxes during fiscal year 2017-18 constituting 98 per cent of the cigarette excise revenue despite a market share of only 67 per cent, the company sources said. In contrary, the local cigarettes companies who are also registered in Pakistan are paying 2% tax despite having 33 per cent of the market share as they are selling their product in the market almost 50 per cent below of its retail price printed on the pack, the sources claimed. The local companies are selling their pack in Rs 25-30 against retail printed prices of Rs 50/60.

Cigarettes are already subject to ‘Sin-Tax’ in the form of excise duties and any further taxes will be a duplication and repetitive increase in the tax on cigarettes, the industry source said.

If the tax is only applied for ‘sin products’, government will eventually lose the revenue when the products volume is decreasing, and in Pakistan case, moving towards illicit cigarette. It is advisable that funding for universal health care comes from overall state budget where tobacco tax already contributed to the state revenue.

Additional tax burden may lead to increasing level of illicit trade risk in the country. Increasing level of illicit cigarette trade will undermine the government’s effort in increasing revenue collection and reduce cigarette consumption to meet health objective.

Legal cigarette industry is still adjusting to the new excise tariff which has already experienced a 56% excise increase in the past 5 months. This is way above the inflation rate of 6% and economic growth rate of 5.8%. If the price has become not affordable, it is likely that consumer will again move to illicit cigarette.

Additional tax burden will worsen the impact, and may impact the whole tobacco industry supply chain i.e. growers, employment, and retailers, the sources said.

Current pack price of the most sold legal cigarette brand is Rs 58. Prior to the implementation of third tier for cigarette excise, price per pack of cigarette was Rs 67. At that time, illicit cigarette rate increased to 40% and led to a significant decline in government revenue.

Further increases in cigarette taxes will push cigarette price up, negatively impacting government revenue and at the same time jeopardize the enforcement efforts of the government.

International examples showing that excessive tax hike will directly impact the illicit trade and decrease of government revenue. After Malaysia’s excessive tax hike of 52.9% in 2015, the country is facing a massive illicit tobacco problem with the illicit incidence currently standing at around 55% of the total market.

The tobacco industry in Pakistan faces a critical challenge with the wide presence of non-tax paid cigarettes, which reached a record high market share of over 41% during fiscal year 2016-17. The primary source of these non-tax paid cigarettes is locally manufactured tax-evaded cigarettes, which were selling at a price gap of almost 170% versus the tax-paid legal cigarettes in 2016-17.

Given the growth of illicit cigarettes incidence to over 40%, the third tier for cigarette excise was introduced as a policy measure in fiscal year 2017-18 to reduce illicit trade by reducing the price gap and this resulted in reducing the market share of illicit cigarettes to 33%.

In addition to evading tax, local manufacturers are seen to be blatantly violating marketing regulations through advertisements, discounts/cashback/giveaways to consumers.

Locally manufactured cigarettes, despite adhering to printing regulations such as health warnings and minimum price on packs, are being sold at street prices even below the minimum tax payable on a pack.

During the latest fiscal budget in May 2018 and subsequent supplementary budget in September 2018, the excise duty was increased by almost 56% thus once again widening the price gap between legal and tax-evaded cigarettes.

With low disposable income, the consumers of legal cigarettes will be unable to absorb multiple tax and price increases and will shift their consumption to cheap illicit cigarettes making the task of enforcement against these illicit operators increasingly difficult.

Currently, the tax evasion in the illicit cigarette trade is in excess of Rs 35 billion each year. Rather than introduction of additional taxes on an already highly taxed sector, the focus should be on fighting illicit trade and increase excise revenue from the sector by Rs 35 billion by enforcement on the illicit manufacturers.

Such excessive and ad-hoc measures shatter investor confidence, compromising the foreign direct investment which is already very low. As per OICCI Business Confidence Index, business confidence in 2018 has fallen to 14% as compared to 21% from November 2017.

Lack of level playing field and unpredictable fiscal and regulatory environment discourages foreign investment and also downgrades country credit rating.

 

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