ISLAMABAD: Taxes paid by multinational companies increased by 14pc in 2017-18, while their net turnover and profit increased by 62pc and 218pc respectively, the National Accountability Bureau’s (NAB) inquiry into the three-tier taxation system for cigarettes has found.

The three-tiered system to collect federal excise duty on cigarettes was made vide statutory regulatory order 407(I)/2017, dated May 29, 2017, by the Federal Board of Revenue (FBR) and later included in the 2017 Finance Act by amending the relevant provisions of the Federal Excise Act, NAB’s initial inquiry explained.

There were previously two tiers of federal excise duty on cigarettes produced in Pakistan. Before 2017-18, the rate of federal excise duty was based on the retail price per pack – Rs74.12 for each pack that cost more than Rs88, and Rs32.98 for packs that cost less than Rs88.

Multinational companies’ taxes, net turnover increased by 14pc and 62pc since introduction of three-tier system

However, with the introduction of the third tier, the federal excise duty for the first tier was Rs74.8 for each pack of cigarettes that cost more than Rs90.

The second tier was for packs for more than Rs58.5 – the federal excise duty was Rs33.4, while the third tier was created for cigarettes that cost less than Rs58.5 and the federal excise duty on these was Rs16.

The FBR had also restricted cigarette manufacturers from reducing cigarette prices to move them from tier one to tier two from the day the budget was announcement, but allowed them to move tier two products into tier three.

The NAB inquiry has highlighted that the new systemallowed multinational companies to lower the prices of all but one product, which fell in tier one. As a result, 86pc of multinational brands are paying the lowest rate of federal excise duty.

Previously, companies would pay Rs32.98 per pack for around 87pc of their sales. Since the introduction of the three-tier system, companies pay Rs16 per pack for 86pc of their sales.

“This has resulted in higher sales due to the reduction in prices, and also reduced tax payment by the companies. Around Rs33 billion tax benefits were obtained by the two main multinational cigarette manufacturing companies through the change in tax slab structure,” a NAB official said.

NAB began investigating the matter after recommendations from the parliament’s Public Accounts Committee (PAC), regarding allegations that companies had benefited enormously from the introduction of the three-tier taxation system.

A similar observation was made by the auditor general of Pakistan on the causes of the decline in tax collection from the tobacco sector.

Published in Dawn, September 9th, 2018