Cigarette manufacturers: FBR accused of introducing complicated FED system

The Federal Board of Revenue (FBR) has introduced a very complex 'slabs system' of the Federal Excise Duty (FED) for the cigarette manufacturers which has only benefited the multinational companies with stagnation in the incidence of taxes ie sales tax/FED on most popular brands of the product. Tax experts told Business Recorder here on Thursday that the multinational companies and the FBR had deliberately implemented a very complicated excise duty system to charge less amount of FED on popular brands of cigarettes.
The existing taxation system of the FED is so complicated which only give maximum benefit to the cigarette manufactures. Prior to budget (2012-2013), World Health Organisation (WHO) has recommended that the FBR should abolish the existing FED charged on the basis of threshold and slabs of the FED for different brands of cigarettes. All brands be treated at par instead of tier system, there should be one system which ensure revenue for the government, help FBR in ensuing compliance and easy to comprehend by all stakeholders. Due to unknown reasons, the FBR fully endorsed the complicated excise regime which facilitates the leading multinational companies. Tax officials and the cigarette manufacturers have made the excise duty structure in such a manner that ordinary consumer would be totally confused while understating the techniques used for imposition of the excise duty on cigarettes. One of the reasons for implementing a confusing tax system for cigarettes is that some of retired bureaucrats have been hired by multinational companies having connection in government circles and policy makers.

Recently, it has been reported that the foreign companies have transferred an amount of over $1 billion aboard on account of profit and dividend during the last fiscal (2011-12). The repatriation of profit and dividend by foreign companies is again on rise and they are repeatedly transferring their profits and dividends. The foreign investors have repatriated nearly $1.061 billion on account of profit and dividend in fiscal 2012 against $758.3 million in fiscal 2011, depicting an increase of $303 million.

On the other hand, multinational companies in the tobacco sector are using different techniques to ensure minimum increase in incidence of taxes on cigarettes. When contacted, a tax official, who have done research on cigarette industry, explained that firstly the existing tax structure should be simple. The present tax structure is complicated and favors to the multinational companies. The incidence of taxes on lower brands should be higher as compared to existing structure.

The incidence of sales tax and federal excise duty on cigarette has not been increased at par with the globally applicable tax rates on popular brands. Globally, there is a standard that the incidence of tax on cigarettes should be at least 70 percent as the cost of production of this commodity is very low.

The incidence of sales tax and FED on the strong brands of cigarette could be termed as stagnant in Pakistan as compared to other countries where incidence of taxes goes up to 70 percent. In Pakistan, if the incidence of sales tax/FED was 42 percent on a specified brand, it has been increased to 45 percent and then 52 percent on annual basis. However, even the incidence of sales tax/FED has been taken up to 60 percent it is still very low as compared to the 70 percent. The technique used by the multinational companies is to re-adjust the middle slabs with upward adjustment in price. In this way, the incidence of the sales tax and the FED has not been increased, but the price has been increased for popular brands to ensure that the incidence of taxes should remain on the lower side. "Resultantly, the FED has been increased in terms of rupees, but in term of percentage, the incidence of the FED did not increase. Apparently, the excise duty has been increase due to increase in price of cigarettes, whereas the incidence in actual terms of percentage has not proportionately increased, he added.

If the incidence of taxes is 70 percent on a specific brand, the technique is to ensure incidence of tax of 50 percent or 60 percent on most popular brands. If the market is captured by two popular brands, their actual incidence of taxes would not be increased at par with the global prevailing rates of taxes. This has been done by increasing prices linking with the FED, but the direct incidence of taxes has not increased.

Official said that the multinational companies have also adopted another technique to discourage introduction of new brands by local units of Mardan etc. This has been done by fixing a minimum price for launching of a new brand. A new brand cannot be launched unless of until a specific price has been fixed which discourages local units to introduce new brands.

When asked about complexity of the tax structure on cigarettes, sources said that the Board has done different experiments in the past since 1988. Sometimes, it was tried to fix tax on the ad valorum basis and sometimes it has been fixed on the basis of specific amount. As there is advancement in different counties, the incidence of taxes has to be increased at par with the global practice. However, the existing structure is very complicated which needs to be simplified. It is in the favour of the tobacco sector to continue with the existing tax slabs structure. For this purpose, in budget (2012-13), the FBR has enhanced tax incidence on cigarettes by revising upward price tiers, official added.

Experts said that the FBR had received proposals from different quarters including WHO to introduce the concept of tax stamping on each pack of cigarette to know about the exact number of sticks and packets manufactured by the units. It is a very easy way of documentation of each and every packet of cigarette produced in Pakistan. In this way, the FBR or Ministry of Finance would be able to implement the track and tracing system of the manufactured items cleared from the factories. The two multinational companies are strongly resisting the proposal of implementing tax stamping or band rolling on cigarette packs. Besides, tax stamping, the multinational companies are also against the restoration of the supervised clearance system at factories. Both restoration of supervised clearance system and tax stamping are the most crucial steps to counter tax evasion in the cigarette industry, experts added.

In the past, World Health Organisation (WHO) had expressed serious concern over nominal increase in the federal excise duty (FED) on cigarettes and withdrawal of excise duty on cigarette rods in budget 2012-13.The government has abolished the FED on filter rods used in manufacturing of cigarettes in budget (2012-13). It is unclear that how such a big facilitative measure has been given to the cigarette manufacturer with no major increase in the incidence of taxes on cigarettes. Instead of simplifying the tax collection system from the industry, the cigarette manufacturer particularly multinational companies were given relief.