In a bid to enhance revenue from the tobacco sector, the government has increased the adjustable federal excise duty (FED) on unmanufactured tobacco from Rs. 10 per kg to Rs. 390 per kg, applicable at the Green Leaf Threshing (GLT) stage.
As per the details, the adjustable excise is applicable to and payable by the cigarette manufacturers.
The objective of this move is not only to increase documentation of the tobacco industry as well as curtail illicit trade but to increase the cost of evasion being done by illicit cigarette manufacturers.
This excise duty is adjustable at the time of filing of returns by the manufacturer. As for export, the rebate may be claimed at the export stage, and for manufacturers; it may be adjusted at the time of filing the manufacturer’s tax returns.
Enhanced duty not applicable to farmers
While briefing journalists, officials of Pakistan Tobacco Company reiterated that the adjustable excise duty of Rs. 390 per kg is not applicable to farmers at all but is a liability to the cigarette manufacturers at the GLT stage, however, the manufacturers can adjust this in their monthly tax returns.
It was highlighted that the false narrative being created regarding this adjustable excise having any impact on farmers is completely baseless and false. Illicit manufacturers are trying to influence policies in their favour by promoting this false narrative.
Officials further explained that the tobacco farmers have nothing to do with the GLT stage as threshing is part of the cigarette manufacturing process. Historically, this adjustable excise duty was increased from Rs. 10 per kg to Rs. 300 per kg in the mini-budget issued by the Pakistan Tehreek-e-Insaf government in October 2018. However, due to pressure from certain quarters, it was reversed before the GLTs became operational.
They said that adjustable advance duty at the GLT stage is a perfect way to control tax evasion as it is the choking point in the process of manufacturing cigarettes.
Currently, there are approximately 13 GLTs in Pakistan, where more than 40 cigarette manufacturers are operating. With regards to enforcement, it is administratively more efficient to monitor 13 GLTs rather than deploying enforcement officials at over 40 cigarette manufacturers or hundreds of thousands of retail outlets. The payable adjustable excise at the GLT stage can also be used as a metric to gauge what revenue was received from the manufacturers at this stage and what percentage was adjusted at the time of filing of tax returns.
The government has been requested to carry out strict enforcement across the board for implementation of the adjustable excise duty on unmanufactured tobacco and also for implementation of the Track and Trace regime to help in curbing illicit trade and providing a level playing field to legitimate players in the industry. Simultaneously, monitoring of cigarettes being manufactured in Azad Jammu and Kashmir (AJK) and being transported to the rest of the country for sales must also be done and the government must set up check posts at all entry/exit points to and from AJK.
Adjustable excise duty will help document the cigarette business in Pakistan which will not only increase revenue generation for the government but will also help curb tax evasion. The government loses approximately Rs. 80 billion in terms of revenue from illicit trade in cigarettes alone.
Tax evasion by the illicit tobacco manufacturers has largely affected the legitimate cigarette industry by making non-duty paid tobacco products easily available to the public and that too at a lower price than the mandated minimum price. In a country where 40 percent of the cigarette market is illegal, there is a dire need for an immediate action plan regarding the enforcement of tax laws across the board.
