Tobacco products: FBR mulling over interim increase in FED

The Federal Board of Revenue (FBR) is actively pursuing a proposal to achieve federal excise duty (FED) target from cigarette industry by introducing an interim increase in excise rate on tobacco products during last quarter (April-June) 2013-14. Sources told Business Recorder here on Tuesday that the board is working out expected revenue implications of the changes in the duty structure on cigarettes in the last three months of 2013-14. In this regard, the board has also consulted two cigarette manufacturers for revision in the FED slabs of cigarettes.

When contacted, an expert said that as the FBR struggles to meet the annual tax collection target, it is also contemplating steps to enhance excise duty collection from the tobacco industry, but it is quite apprehensive as market dynamics do not support any drastic and sudden steps.

In the budget 2013-4014, a fully specific two tier duty structure was introduced by the FBR in consultation with the two large multinational cigarette manufacturers. It was expected that the steps would result into 15% increase in the excise duty revenue collection. But the figures so far show that the revenue collection in absolute Rupee terms has not touched the desired level.

Market dynamics like excessive hoarding by the traders in the previous fiscal year had a large impact on the current fiscal's sales and revenue of the tax compliant tobacco industry. In the fiscal year 2012-13 a total sale of 66.8 billion sticks helped the government mop up revenue of Rs 61.5 billion as compared to expected revenue of Rs 58.6 billion. Hoarding in April-May 2013 was prompted by strong rumours that the FBR intended to introduce a heavy excise increase, he added.

Industry sources confirmed that the excessive hoarding led to a distortion of industry projections for the current fiscal year. Continuous post-budget off-loading of stocks by the traders thus has negatively impacted industry volume and the government revenues in FY 2013-14. While introducing two tier specific excise duty structure, the FBR and the industry based its projections on market consumption and sale volume of 64 billion sticks for FY 2012-13 & 2013-14. It was understood then that a predictable duty structure would be better for the government and industry.

The current excise structure gives full control to the government as the previous excise structure depended on the manufacturers to increase prices in order for a raise in excise revenue. The new structure removes this dependence and gives the government autonomy to increase excise on its own.

A detailed analysis of the historic trends of tobacco sales and revenue also suggests that normally the first two quarters post budget witness lower volumes. These start to pick up towards the third quarter and near the budget sales jump. The new excise structure has resulted in 7.8% revenue growth during July'13-January'14, despite low volume of sales. However sales figures show that despite higher tax incidence the revenue target for excise duty collection will not be met as 2.8 billion sticks sold in the previous fiscal will lead to lower volumes for the tax complaint industry in the current year, they said.

The FBR is currently considering a proposal to achieve FED revenue targets for the cigarette industry, by introducing an interim increase in excise rate on tobacco products for the last quarter of the current fiscal year (April 2014) based on the current tax structure. This proposal may also get a positive response from the tobacco industry.  Chesterfield Bronze cigarettes.

Another market dynamic that limits FBR option is that sudden and exorbitant increases in cigarette prices that are higher than general inflation push consumers to cheaper cigarettes resulting in an increase in illicit trade. Pakistan has witnessed an increase in the consumption of illicit brands since last few years. Oxford Economic Report a study on the tobacco industry in Asia shows that currently with a market share of 25% in Pakistan, the no-duty paid segment is a serious threat to the government's objectives; reducing the incidence of smoking and increasing revenue from the industry.

Economic experts believe that expecting higher revenues from the legitimate industry, where volumes are not growing, but in fact losing to illicit trade due to lack of the government enforcement, could impact the government revenue as consumers will shift to illicit non-duty paid brands available at a fraction of a price.