Govt to Face Revenue Loss of Rs. 19 Billion Due to FED Increase on Cigarettes

The Federal government will bear a Rs. 19 billion revenue loss in an unprecedented hike in Federal Excise Duty (FED) on cigarettes during the current fiscal year.

In a media briefing session by Pakistan Tobacco Company Limited, the officials stated that according to calculations, if 30 percent of Tier II volumes start selling at the minimum legal price, then just the loss of sales tax revenue to the government will be Rs. 19 billion. This is because the minimum legal price has not increased in line with past practice.

This is because the minimum legal price has not increased in line with past practice, he added.

The anomaly created by the Federal Board of Revenue (FBR) in the excise structure of cigarettes to keep the minimum price artificially low would increase illicit trade from 35 percent to 60 percent in 2022-23.

The officials of the Pakistan Tobacco Company Limited (PTC) showed serious concern over anomalies in the mini-budget due to the unprecedented increases in FED with irregular increases in threshold and said it will not help achieve revenue targets.

The government increased the FED rates for Tier 2 brands by Rs. 3000 per 1000 sticks to Rs. 5,050 and by Rs. 10,000 per thousand sticks for Tier I brands to Rs. 16,500. This has resulted in an increase of 146 percent to 154 percent respectively. The retail price threshold, however, was increased from Rs. 6,660 to Rs. 9,000 per thousand sticks – a 35 percent increase only. If cigarette prices cross Rs. 9,000 per 1000 sticks, it will attract a Rs. 16,500 rate, and lower will fall in the Tier 2 rates.

Historically, the Retail Price Threshold (RPT) used to move in line with the increase in Tier-1 FED but this time there is a deviation from the past precedent and not increasing the RPT systematically will have multiple negative implications. The Minimum Legal Price (MLP) is set at 45 percent of the Retail Price Threshold, now increased to 60 percent. Unfortunately, because the Retail Price Threshold did not increase as per the past precedent, there was a negligible increase in the minimum legal price (MLP). Currently, the MLP stands at Rs 108. This means the lowest price of any packet of cigarettes as per law is Rs. 108.

As expensive cigarettes become even more expensive, cheaper cigarettes continue to remain cheap as the floor, the minimum price of a packet of cigarettes has not increased in line with the Tier 1 increase, with the MLP the 45 percent of the Retail Price Threshold.

PTC requested that the retail price threshold should increase in line with the increase in Tier 1 rates so that the minimum legal price in the country comes up and criticism that Pakistan has the lowest-priced cigarettes, stops. It is perceived that Pakistan has one of the lowest weighted average cigarette prices in the world. This is because more than 1/3rd of the market is illegal and sells below the minimum price and tax applicable per packet of cigarettes.

According to PTC officials, this will not only severely impact the sustainability of legitimate businesses but will also impact exports, foreign direct investment, employment, etc.

PTC officials believe that a rational tax increase with a corresponding Retail Price Threshold and consequently Minimum Legal Price increase coupled with stringent actions against illicit cigarette trade and across-the-board implementation of a track and trace system will help the government generate more revenue from the industry.

  • I think the concern is valid. Instead of increasing cigarette prices so much government should concentrate on stopping smuggling.

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