ISLAMABAD: The National Accountability Bureau (NAB) has initiated an investigation into Rs33 billion in tax benefits to two cigarette manufacturing companies as a result of the three-tier tax structure that has allowed cigarette companies to pay less tax while improving sales.

On May 23, the Public Accounts Committee (PAC) had recommended a special report by the Auditor General of Pakistan on the causes of decline in tax collections from the tobacco sector.

After the introduction of the three-tier tax structure in May last year by the PML-N government, two large companies shifted their popular brands to the lowest tax tier, thereby increasing sales and cutting taxes by 50pc, the audit report said.

Two companies moved popular cigarette brands to lower tax tier after tax structure was altered, audit report finds

After the PAC, NAB is now investigating the matter. NAB Rawalpindi spokesperson Mohammad Bilal said: “We have already taken up the matter and an initial investigation has begun against cigarette manufacturers.”

He said NAB would take two months to verify the records and four months to investigate, under the set procedure.

When asked whether the auditor general’s special report would help NAB investigate the multi-billion rupee loss to the national exchequer, Mr Bilal said it could be helpful but he was not sure if investigators had received the report or not.

In May 2017, the Federal Board of Revenue (FBR) introduced a new tax tier in which federal excise duty was 50pc less than the lowest previous rate. The FBR also did not restrict companies from moving brands from the second to third tier, allowing two manufacturers to benefit by Rs32.9bn, according to the report.

Pakistan has one of the largest populations of tobacco users in the world; around 11pc of the total population are smokers.

The World Health Organisation and other international bodies have recommended that 70pc of the price of cigarettes should be levied as federal excise duty in order to discourage smoking.

The FBR kept the new tiered system in place in the upcoming 2018-19 fiscal year, setting aside stakeholders’ recommendations to restore the two-tier structure and make cigarettes more expensive in order to discourage consumption.

The FBR raised duties by just 96 paisas in the 2018 Finance Bill, despite recommendations from the Ministry of National Health Services, the National Assembly Standing Committee on Finance and the PAC chairman to increase the excise duty to Rs44 per pack.

The finance bill increased the excise duty by 6pc on the first tier – which amounts to Rs4.48 per pack, 6pc on the second tier – Rs2 per pack, and Rs0.96 per pack for the third tier.

Pakistan is signatory to the WHO Framework Convention on Tobacco Control, which binds it to increase taxes to bring down tobacco consumption.

Published in Dawn, May 30th, 2018