New FED structures on cigarettes show results


ISLAMABAD: Fiscal budget 2013-14 introduced remarkable changes to the Federal Excise Duty (FED) structure on cigarettes. Excise structure for cigarettes was changed from a complicated three tier mixed system to a dual tier fully specific structure.
The tobacco experts said various countries have successfully adopted a fully specific structure, since it protects government revenues and also provides predictability.
The start of this fiscal year witnessed public debates suggesting the tobacco industry’s proposed excise structure has been very damaging for the Federal Board of Revenue (FBR) where the industry has failed to deliver results as projected by them at the time of introducing the structure.
This not only gives the government complete autonomy to manage excise level but also gives tobacco industry the liberty to set prices of cigarettes based on market dynamics.
FBR officials were worried the reformed excise structure would be unable to deliver the desired results and at various occasions there were discussions within the FBR, during which they contemplated reverting to the previous structure.
Industry representatives said they were aware of the low collections during the first few months of the fiscal year, however this was a normal phenomenon of the tobacco industry where the trade channel hoards stocks at pre-budget prices and witness low sales during the post-budget months. Last fiscal year experienced exceptionally high levels of hoarding, which did distort industry figures since stock offload took a few months longer than normal. Although to be fair, the tobacco industry kept explaining to the FBR that fully specific is the best structure benefiting the government revenue, the industry and the economy as a whole.
Despite serious apprehensions by some senior FBR officials, it is interesting to see the new structure has performed exceptionally well. The reformed structure is poised to give a growth of over 14 percent in government revenue, which in absolute rupee terms is the highest growth in any given year for government revenue from the tobacco industry.
FBR figures show the revenue from tobacco industry as of April has already crossed Rs 70 billion and the expected revenue by end of the fiscal year is expected to touch Rs 87 billion which is higher than the projected target for fiscal year 2013-14.
Such positive development in the taxation laws gives FBR the confidence to work closely with the industry for a sustained growth in government revenues.
Elicit trade, steep excise hikes and pre-budget hoarding are one the key challenges facing the tobacco industry. The industry is seeking legislation to counter the issue of pre-budget hoarding by way of introducing bi-annual excise increases, in line with the Consumer Price Index. The industry also seeks increased and effective enforcement of laws to counter the menace of illicit trade in cigarette, which is growing at an exponential rate, undermining government fiscal and health objectives.

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