The revenue collection from tobacco industry likely to fall short of targets after a massive increase in Federal Excise Duty (FED), a report revealed on Friday.
According to the report released by Philip Morris (Pakistan) Limited, this unexpected and unprecedented increase in excise is likely to provide an opportunity for illicit non-tax-paying tobacco manufacturers to expand their businesses at the expense of the compliant tax-paid tobacco industry. The report stated that “Without effective monitoring, the annual estimated loss of more than PKR 80 billion to the National Exchequer caused by the illicit non-tax paid sector is expected to further increase.”
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The Track & Trace System for the tobacco industry was implemented effective July 01, 2022, with a view to enhance tax revenue, reduce counterfeiting, and prevent the smuggling of illicit goods through the implementation of robust, nationwide electronic monitoring. However, to date, only Philip Morris (Pakistan) Limited and two other companies have fully implemented the System, whereas the remaining tobacco manufacturers are still operating without the implementation of the System.
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The report warns that “the System could only be effective with its across-the-board implementation and robust monitoring of the production volumes and tracking of the goods at the retail outlets.”
The Government announced a targeted revenue of PKR 200 billion in taxes from the tobacco industry through the mini budget in August 2022, and a supplemental budget was announced in February 2023 with a further increase in revenue from the tobacco industry over and above the August 2022 target.
The cumulative increase in FED in the current fiscal year stands at more than 200%, with the minimum price prescribed under the tax laws for the levy and collection of FED and Sales Tax also increased. However, the report states that “according to the latest market observation, illicit non-tax-paid cigarettes are being sold at an average price of PKR 100 per pack which is significantly below the legal minimum price as mentioned above.”
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The report also highlights economic pressures, demand and supply disruptions, and political instability in the country that are making the operating environment increasingly challenging for businesses. During the quarter ended Mar 31, 2023, Philip Morris (Pakistan) Limited reported a significant decrease in domestic Net Turnover of PKR 3,456 million reflecting a decline of 23.1% vs. SPLY driven by the massive decline in volumes due to an excise hike in Feb’23. The Company recorded a profit after tax of PKR 379 million for the quarter ended Mar 31, 2023, reflecting a huge decrease of 67.0% vs. SPLY driven by the impact of the decline in volumes.
In conclusion, the increase in FED and the non-implementation of the Track & Trace System for the tobacco industry are expected to cause a shortfall in revenue targets set by the Government from the tobacco industry. This situation could further increase the annual estimated loss of more than PKR 80 billion to the National Exchequer caused by the illicit non-tax paid sector.
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The report suggests the need for effective monitoring of the production volumes and tracking of goods at the retail outlets to prevent this revenue loss. The Company remains vigilant about the changes in the market dynamics and will endeavor to manage the operations effectively in these challenging times.