The Federal Board of Revenue (FBR) did not meet its revenue collection target from cigarette sales in April 2023, despite the sharp increase in Federal Excise Duty (FED) on the tobacco industry through the mini-budget in February this year.
Sources within the FBR revealed that the agency collected only 20 percent of the estimated FED collection from cigarette sales in April, with one tax office only managing to collect Rs1.2 billion compared to an estimated Rs4 billion.
The FED rate increase was intended to generate substantial revenue, but it has had the opposite effect. It has caused a significant decline in cigarette production in the documented sector, and smuggled cigarettes have flooded the domestic market.
In April of this year, a registered cigarette manufacturing company with the FBR only produced 1.6 million sticks compared to 10 million in the same month of the previous year.
Philip Morris (Pakistan) highlighted the prevalence of non-duty paid cigarettes in the market due to the sharp increase in FED, which has negatively impacted investor confidence due to the turbulent economic situation, import restrictions, rupee devaluation, and rising business costs.
The increase in FED has also created a challenging environment for the tax-paid tobacco industry as it has widened the price gap between illicit non-tax-paid and tax-paid cigarettes, favoring the former. This may lead to shortfalls in government revenue as more adult smokers may shift from the tax-paid sector to the non-tax-paid sector.
The increase in FED on cigarettes has been substantial, with a cumulative increase of over 200% in the current fiscal year, resulting in a price impact of more than 250% for adult consumers compared to Q1 2022.
The minimum price for the levy and collection of FED and Sales Tax has also increased from Rs70.1 to Rs127.4 per pack. However, illicit non-tax-paid cigarettes are being sold at an average price of Rs100 per pack, well below the legal minimum price. The government announced a target of generating Rs200 billion in taxes from the tobacco industry during the fiscal year 2022-2023, with an additional Rs170 billion targeted through the supplemental budget announcement in February 2023.
The government needs to take immediate and effective enforcement measures against the non-tax-paid illicit tobacco sector to meet the revenue targets. In the absence of any effective measures against the non-tax-paid sector, the government may not be able to meet the revenue targets. The illicit non-tax-paid sector causes an estimated annual loss of more than Rs80 billion to the National Exchequer.
