New tax, old woes – Independent Pakistan

By Staff Reporter

ISLAMABAD: In a bid to combat the rampant trade of illicit cigarettes and shore up government revenues, the Federal Board of Revenue (FBR) has introduced a controversial new advance tax on acetate tow, a key raw material used in cigarette manufacturing. The tax, amounting to Rs44,000 per kilogram, is poised to create a significant financial burden for formal sector cigarette manufacturers, as they produce approximately 10,000 cigarette filters per kilogram of acetate tow. The move has sparked widespread concern among industry stakeholders who fear it could exacerbate liquidity issues within the formal sector while also impacting the illicit cigarette market.

The imposition of this advance tax represents a drastic measure within the broader context of the 2024-25 budget, where the government is attempting to bolster revenue collection amid economic challenges. However, despite the fact that this is an adjustable tax, the financial pressure on legitimate cigarette manufacturers is likely to be severe. The formal sector, already struggling with high operational costs and competitive pressures from the untaxed, illegal market, may find this additional burden hard to bear.

The cigarette industry has been grappling with several challenges over the past few years. A series of federal excise duty (FED) hikes, including a staggering 200 percent increase in the duty structure over the last two fiscal years, has already strained the sector. These hikes were intended to curb smoking by making cigarettes more expensive, but they have also inadvertently widened the gap between the prices of legal and illicit cigarettes. With the illicit sector often avoiding taxes entirely, their products are sold at significantly lower prices, making it difficult for legitimate companies to compete.

This new tax on acetate tow, therefore, risks pushing the formal sector into a deeper liquidity crunch. Companies might struggle to maintain their cash flow, potentially leading to production slowdowns or even closures. The tax burden could force them to pass on the costs to consumers, driving up the prices of legal cigarettes even further. This, in turn, could have the unintended consequence of driving more consumers towards cheaper, illegal options, further entrenching the black market for cigarettes.

On the other side of the spectrum, the government’s measures are also aimed at tackling the persistent problem of illicit cigarettes, which are estimated to cause significant revenue losses for the national exchequer. By imposing a high advance tax on acetate tow, the government hopes to increase the cost of production for illegal manufacturers, thereby narrowing the price gap between legal and illegal cigarettes.

Moreover, the budget for 2024-25 has introduced new administrative powers for the FBR, enabling tax authorities to seal retail outlets found selling illegal cigarettes. This represents a crucial step towards enforcement, but its success will hinge on the effective use of these powers. Without strict enforcement, the illegal cigarette market, which has become deeply entrenched across the country, may continue to thrive.

The sale of illicit cigarettes has become a pervasive issue, with these products widely available in markets and kiosks throughout the country. The low prices of these cigarettes, often due to evasion of taxes and duties, have made them an attractive option for consumers, especially in a country where economic pressures are mounting. However, without consistent enforcement of the new regulations, the problem is unlikely to be resolved. The FBR’s newfound authority to seal off retail outlets could act as a deterrent, but only if it is applied rigorously and without bias.