The government is likely to increase the advance adjustable Federal Excise Duty (FED) on un-manufactured tobacco from Rs10 per kg to Rs500 per kg in budget 2020-2021.

Sources told Business Recorder that the proposal was discussed between the budget makers of the Federal Board of Revenue (FBR) and documented cigarette industry during a meeting held at the FBR House, here on Friday.

This is a major documentation measure, which is presently applicable to record actual production/supply/consumption of tobacco used in manufacturing of cigarettes.

According to sources, the meeting between the tax authorities and the legitimate cigarette industry discussed various proposals to increase revenue and check illicit trade including raise in the FED on un-manufactured tobacco in coming budget 2020-2021.

During passage of the Finance Bill, 2019, FBR chairman had informed both the National Assembly and the Senate Standing Committee on Finance that tobacco growers/farmers would not be required to deposit the advance tax on tobacco, as it is the sole responsibility of the manufacturers to deposit tax for documentation purposes.

An explanation in the Finance Act, 2019, reads: “The duty payable shall always be borne by the cigarette manufacturer and the burden thereof shall not be passed on to the tobacco grower in any manner."

Therefore, the tax would be borne by the manufacturers and not by the farmers or growers. The FED was intended for tracking and tracing of tobacco purchases in order to prevent tax evasion, the FBR chairman added.

The documented cigarette manufacturing industry has recommended to the FBR to immediately increase the advance adjustable FED on un-manufactured tobacco in the coming budget to up to Rs500/kg.

They informed the FBR that the decrease in the FED on the purchase of un-manufactured tobacco, and recommended that the FED on non-manufactured tobacco [which was reduced to Rs10/kg through Finance Act, 2019] needs to be increased to at least Rs500/kg. Further, rate of adjustable advance income tax, currently five percent, should be increased to 10 percent.

Tax experts said the decrease in adjustable FED on tobacco in last budget had serious implications. Firstly, local cigarette manufacturers would again start massive evasion of taxes on cigarettes by concealing quantity of tobacco consumed in manufacture of cigarettes.

Secondly, this anti-documentation move of the government would send a wrong message domestically as well as globally that Pakistan has taken away the documentation regime.

Thirdly, a check on the local cigarette manufacturers to maintain record of the tobacco being consumed would be taken away, resulting in increased illicit trade of cigarettes.

The tobacco growers/farmers would not be required to deposit the advance tax on tobacco, as it is the sole responsibility of the manufacturers to deposit tax for documentation purposes.

The government in Supplementary Budget 2018 introduced this adjustable FED to reduce tax evasion and increase the tax collection from the cigarette manufacturers who are bound to declare the tobacco they process in order to manufacture cigarettes.

As per the law, this advance adjustable FED was not applicable on farmers, but cigarette manufacturers had to pay this advance tax. As per sources, it is a misconception created by the tax evading local cigarette manufacturers that this tax is on farmers.

The reduction in adjustable FED on tobacco will lead the sector to once again being undocumented and increase tax evasion. It seems as if the prime minister's dream of increasing taxes will be reduced to ashes by none other than his own team members.

Last year, before budget National Assembly Speaker Asad Qaiser headed special committee on this advance tax, which resulted in decrease of the advance adjustable FED on un-manufactured tobacco to Rs10 per in the name of growers, who are not required to pay this tax.

Copyright Business Recorder, 2020