FBR opposes ‘sin tax’ on tobacco

industry
The News

February 22, 2019

ISLAMABAD: The Federal Board of Revenue (FBR) has advised against imposition
of sin tax on the tobacco industry, arguing that it would cause substantial revenue loss
in the range of Rs25 to 30 billion annually, The News has learnt.

However, the federal cabinet Thursday night could not finalise decision on Health
Levy and it was decided that ministers for finance and health would sit together to sort
out finances for the health sector. It seems difficult that there be any move on this
front till upcoming budget for 2019-20.

“We have taken a clear cut view before the government that there is no need to disturb
the existing three tier tax structure on the tobacco industry at this stage because it will
cause substantial revenue loss on account of Federal Excise Duty (FED) and Sales
Tax (ST)” one top official of the FBR confirmed to The News here on Thursday.

Quoting latest study done by the Pakistan Institute of Development Economics

(PIDE), FBR official sources said graphs showed from the Household Income
Expenditure Survey (HIES) that tobacco consumption had not decreased because of
increased rates of cigarettes rather it shifted from formal to illicit or smuggled
cigarettes when the tax burden increased. They said changes in tobacco taxation at this
stage would result into placing more complex system so the FBR took decision to
oppose this move at this stage.

The debate continues unabated since long whether taxation increase will help reduce
consumption at a time when the illicit tobacco possessed major share in the market.
The World Health Organization (WHO) recommends increased taxation burden on the
tobacco industry that ultimately helps reduce its usage.

However, the tobacco industry has taken stance before the government by stating that
the legitimate market possessed 66 percent share while illicit share was standing at 34
percent by March 2018.
They estimated that the formal tobacco sector basically belonged to two giant
companies as they were estimated to contribute Rs115 billion in shape of tax
collection during the current fiscal year.

The selling price of Value for family brands (VFM) stands at Rs58 per back. On other
hand, their study on illicit tobacco showed that their share stood at 34 percent and
contribution into national kitty was just 2 percent.

“The government is losing Rs45 billion due to illicit tobacco,” the study estimated and
added that the price of VFM stood at Rs28 per packet. This kind of huge differential
existed in the market will result into shift from formal to illicit tobacco and the
government will get nothing out of it, they added.

In the premium brands, the tobacco industry showed that the total volume stood at 264
million packs and tax per pack was in the range of Rs111 so total collection in shape
of Federal Excise Duty (FED) and Sales Tax fetched Rs31 billion.

If Health Tax imposed at packet price of Rs10 the volume of premier brands will slash
down by 20 percent so the volume could touch 211 million packs and total collection
of FED and Sales Tax could be reduced to Rs23 billion from existing level of Rs31
billion. However, the Health Tax collection could bring Rs2 billion into national kitty
for premier brands.

In vase of Value for Family Brands (VFM), the total volume stands at 2.4 billion
packs and tax per back was in the range of Rs33 so the total collection of FED and
Sales Tax fetched Rs82 billion.

If Health Tax is imposed at rate of Rs10 per pack the consumption would decline by
30 percent and total volume could touch 1.7 billion packs. The tax collection on FED
and Sales Tax could be reduced from Rs82 billion to Rs56 billion while the
imposition of Health Tax could generate Rs17 billion on per annum basis.

On illicit brands, the total volume has been estimated at 1.4 billion packs while FED
and ST collection was estimated at Rs2 billion. With no Health Tax, the volume of
illicit tobacco is expected to go up by 56 percent phenomenally while contribution
into national kitty would be standing at zero.

Overall the FBR’s collection was projected to decline by 31 percent or Rs34 billion on
per annum basis, the tobacco industry’s study concluded.