ISLAMABAD: Bowing down to resistance from multinational companies and objections of small manufactures and Transparency International Pakistan, the Federal Board of Revenue (FBR) has halted its plan for implementation of high-security tax stamps/labels on cigarettes.
According to details, the FBR is now trying to introduce a foolproof mechanism for implementing high security Tax stamps/labels combined with state-of-the-art Track & Trace system on cigarettes through a new Request for Proposal (REP). The FBR wanted to implement the new system in a transparent manner. The past experience of introducing Tax Stamps/Labels was a total failure due to serious issues involved in the whole project.
The purpose of track and trace system is to monitor production of dutiable and taxable goods to ensure that due duties and taxes were paid on the goods produced and adequate checks are placed on the sale of non-duty paid goods in the consumer market.
A Request for Proposal (REP) was prepared and advertised in the media on March 8, 2013 to implement the project of Tax Stamping on cigarettes. However, due to strong opposition from the cigarette manufacturers on various grounds, and objections from Transparency International Pakistan, the project has been held in abeyance by the Board.
The main grounds for opposing the system are: Firstly, the major players (multinational cigarette manufacturing companies) were concerned about the cost of the labels and system, which was to be borne by the manufacturers. According to them, consumers would not be willing to pay additional Rs 5 or so (estimated) per pack, when the average cost of a pack was about Rs 35.
Secondly, small cigarette manufacturers approached the Federal Tax Ombudsman, expressing apprehension that they would no longer be able to compete with the larger manufacturers. Thirdly, both the groups of manufacturers raised objection that when the government was not able to enforce implementation of Health Warning on cigarettes or crackdown on openly available smuggled foreign brands, the fixation of labels would be an exercise in futility.
Fourthly, TI-Pakistan raised objections on the RFP that it appeared to favour a specific supplier, and was in violation of PPRA Rules. The sources said that like in most countries, cigarettes and other tobacco products in Pakistan attracted high rates of duty and taxes.
The present rates of Federal Excise Duty (FED) and Sales Tax on cigarettes are as follows: Locally produced cigarettes if their on-pack printed retail price exceeds Rs 2,286 per 1,000 cigarettes, the rate of the FED is Rs 2,325 per 1,000 cigarettes (sales tax rate 17 percent) and locally produced cigarettes if their on-pack printed retail price does not exceed Rs 2,286 per 1,000 cigarettes, the rate of the FED would be Rs 880 per 1,000 cigarettes (sales tax 17 percent).
Thus, the combined incidence of FED and sales tax comprises a major component of the price. Because of these high rates, cigarettes are highly prone to under-reporting of production and sales, and evasion of duty and taxes. Different methods have been adopted in different countries to prevent such leakage of revenue, including physical supervision by tax officials, affixation of bandroles or tax stamps, electronic monitoring, etc. Each of these methods has different levels of success and drawbacks.
The FBR is presently actively considering various options to implement electronic monitoring of cigarette manufacture and sale. Presentations from different companies have been viewed, and revised RFP has been prepared. After approval, proposals will be publicly sought from solution-providers in an open and transparent manner. Efforts will be made to address the objections and apprehensions raised by the stakeholders.
