Monday, July 29, 2019

Higher taxes will increase cigarette consumption

ISLAMABAD: The price differential between duty paid cigarettes and illicit products would considerably increase after imposition of Health Tax on cigarettes in the upcoming budget.

The taxation measures to be taken in coming budget on tobacco industry would have following repercussions: People will shift from legal brands of cigarettes to illicit due to increase in price difference between duty paid and non-duty paid cigarettes, major increase in smuggling due to higher prices of documented brands.

Violations of health laws and warnings by the illicit cigarettes manufacturers will continue to go unchecked by authorities giving them further edge over duty paid cigarettes. The component of local tax evasion on cigarettes is already very high and any move to impose Sin Tax would further encourage tax evasion at domestic stage. The proposed 'Sin Tax' on tobacco industry would result in production of local tax-evaded cigarettes and increase in tax evasion in tobacco sector.

The Ministry of National Health Services, Regulations and Coordination with the help of the FBR will have to take appropriate measures to check illicit cigarettes in Pakistan, reflecting serious violations of health laws/rules and regulations by the 'illicit' industry.

The alarming figures of consumption of illicit cigarettes on daily basis cannot be ignored by the Health Ministry. These illicit cigarettes mainly include non-duty paid cheap cigarettes whose sale is openly violating all kinds of rules and regulations of the Ministry of Health.

The situation would become worst after imposition of Health Tax and additional FED from July 1, 2019.

As per Oxford Economics Study, Pakistan ranks 1st in illicit trade of cigarettes in Asia, with a total volume of 326 billion illicit cigarettes consumed in 2017. The primary reason for existence of illicit manufactures is the tax-driven price differential between legal and illicit brands, which currently stands at 130%.

The documented tobacco industry is repeatedly urging the government to adopt a balanced fiscal approach with effective enforcement measures to curtail the sale of tax-evaded cigarettes, which would generate revenue over and above Rs 115 billion by the end of 2018-19.

The documented tobacco industry has estimated that the revenue collection is expected to cross Rs115 billion by the end of 2018-19 and will increase further if the government retains this excise structure.

The lowest tier should remain intact in coming budget to provide an opportunity to the local units to come into the tax net and enforcement efforts need to be geared up to avoid losses.

The FBR has acknowledged the fact that two multinational cigarette manufacturing companies would contribute over Rs115 billion to the FBR by the end of 2018-19, reflecting contribution of record revenue from documented tobacco sector.

However, the most dangerous aspect in consumption of illicit cigarettes is the blatant violations of the health regulations by the local manufacturers of Non tax paid cigarettes as well as non-payment of applicable rates of Federal Excise Duty under FED slabs notified by the FBR.

Ministry of Health had proposed imposition of 'Sin Tax' on tobacco industry and beverages to generate additional revenue. At the same time, apparently there is no system in the Health Ministry to check or control or monitor the manufacturers, suppliers, sellers and impact on consumers of illicit production of cigarettes. Moreover, in the absence of authentic data on illicit trade consumption of cheap cigarettes in the country, this huge consumption has not only destroyed the documented industry but also serious health problems for those consuming illicit cigarettes in Pakistan.

Health tax is another form of excise tax which will again increase prices of legitimate brands but have no effect on the 33 percent illicit market that will continue to sell even below the minimum price in the country. Therefore, the enforcement against this black market is necessary and coordination amongst various departments is necessary to take inputs and industry on board.

Furthermore these illicit cigarettes violate other health laws such as advertising, targeting youth, giving gifts, incentives and lucky draws, all of which are prohibited under the health ministry laws.

Currently in Pakistan, tax increases are counterproductive in achieving the government's revenue and health objectives since they are encouraging people to smoke cheaper cigarettes that are more affordable. This results in attracting the youth to initiate smoking due to cheap prices as 1 cigarette is available for Rs1.

The experts have apprehended that the massive raise in taxes on tobacco would immediately result in increase in smuggling and business of non-duty paid cigarettes in 2019-20. Without realizing the fact that over-burdening any sector with additional taxation would be a disaster for that sector, the government is mulling to impose Health Tax and additional FED on tobacco and beverages.

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This article appeared in https://www.thenews.com.pk on June 5, 2019.

Friday, July 5, 2019

'Government go-slow', as Pakistan's anti-corruption drive bites

ISLAMABAD (Reuters) - An anti-graft crusade promoted by Pakistani Prime Minister Imran Khan has led to swathes of arrests of politicians, but critics say the economy is suffering as vital projects are put on hold by officials fearful of being caught up in the dragnet.

Khan won power last year vowing to root out corruption among what he cast as a venal political elite and views the probes into veteran politicians - including jailed former premier Nawaz Sharif and ex-President Asif Ali Zardari - as long overdue.
While few dispute the need to clean up Pakistani politics, the National Accountability Bureau (NAB) campaign has become a topic of fierce political debate.
Some in the business community say they worry the drive is hurting an ailing economy, which has just received a $6 billion International Monetary Fund bailout.
And the focus of the NAB so far on the new government’s political foes has prompted accusations it is a one-sided purge backed by Pakistan’s powerful military, which is seen to favor Khan. The government denies targeting political opponents.
NAB did not respond to a request for comment. The military also did not respond, but in the past it has denied interfering in politics or influencing NAB, an independent body within Pakistan’s legal system with its own investigators and courts.
The crackdown has also ensnared civil servants, who say they have become collateral damage in the accountability drive.
Six high-ranking officials who spoke to Reuters painted a picture of a civil service in disarray and decision-making at a standstill, with senior officials avoiding signing off projects or making decisions that could open them to bribery accusations.
“If a project works out, I don’t get a gold medal,” said one senior federal official. “But if it doesn’t work out, I might go to jail.” A second official spoke of an administrative “go-slow” amid a climate of fear in the bureaucracy.

POLITICAL CASES?

The government rejects accusations that NAB is impacting the economy, calling such allegations opposition propaganda, and says graft is to blame for Pakistan’s current economic woes.
Khan last month launched a commission to investigate projects and agreements that helped increase overall debt between 2008-2018, staffing it with members of NAB and military intelligence agencies.
Science Minister Fawad Chaudhry said government officials make up a small number of NAB cases, but their concerns had reached Khan and a special cell had been created within NAB to deal with bureaucrats’ issues.
“The rise of Imran Khan is basically a middle class revolution against corruption,” Chaudhry added. “You can’t expect from us that we will take the issue of corruption lightly.”
NAB last month arrested former President Zardari and his sister over alleged false bank accounts and money laundering. They both deny wrongdoing and call the arrests politically motivated.
Since Khan assumed power last August, NAB has continued investigating jailed former Prime Minister Sharif, who has alleged the military’s hidden hand is behind many of the anti-corruption cases against his family.
Fresh probes have also been opened involving Sharif’s brother and many of his closest allies, including at least eight ministers from the previous government. They all deny wrongdoing and say they are victims of persecution.
“Everybody who is against this government has a NAB case,” said one opposition politician who was a minister in the previous government.
Inquiries have also been launched against some prominent businessmen.

“KILLS CONFIDENCE”

Pakistan’s new liquefied natural gas (LNG) infrastructure, erected at breakneck speed by the previous administration, has emerged as a major anti-corruption battlefield.
LNG terminals built in 2016 and 2017 were vital to ending a decade of electricity shortages and turned Pakistan into one the world’s hottest LNG markets, with Qatar and Italy’s Eni signing long-term gas deals worth billions.
But Khan’s Pakistan Tehreek-i-Insaf (PTI) party has for years alleged corruption. In April, on NAB’s instructions, the government barred former Prime Minister Shahid Khaqan Abbasi, ex-Finance Minister Miftah Ismail, and six bureaucrats involved in the Qatar deal for the first terminal from leaving the country. They all deny wrongdoing. No allegations of wrongdoing have been made against the Qatari side.
Abbasi, who as petroleum minister masterminded Pakistan’s embrace of LNG, said he had to take a lead role because many officials were afraid of multi-billion dollar projects.
“Nobody wanted to do anything as they were scared of NAB,” said Abbasi, who said bureaucrats were now paying a price despite helping end electricity shortages. “We had good people who stuck their neck out and they’re all suffering today.”
A third LNG terminal and a new gas pipeline needed to keep up with rising energy demand have been on the “backburner” for more than a year as no decision making is taking place across ministries, according to an energy official.
“Bureaucrats being barred from leaving the country kills confidence,” he said. “We are going to have a (energy) crisis in a year or two.”
The result, say the officials who spoke to Reuters, is that senior colleagues nearing retirement are refusing to sign off on projects due to fears of being dragged out of retirement to answer NAB inquiries for years.
“If I have to make a decision about a $10 billion refinery... I’ll sit on this file for six months, and get the next guy to make that decision,” said the first senior federal official.
A senior civil servant in the Khyber Pakhtunkhwa province said he hasn’t approved any major project since late 2018.
“All bureaucrats know that once you are tagged with NAB, no matter if you’re innocent or you really did some corruption, you have no future,” he said. “You’re finished.”
Reporting by Drazen Jorgic; Additional reporting by Asif Shahzad; Editing by Alex Richardson