ISLAMABAD: The Federal Board of Revenue (FBR) has launched an internal inquiry to investigate the cause of Rs60 billion revenue losses in a single year from the tobacco industry following changes in tax structure for the sector in 2017.
Through Finance Bill 2017, the previous government had introduced a three-tier federal excise duty with almost 50 per cent cut in duty. Since the introduction of this new tax structure in May last year, two leading cigarette manufacturing companies shifted their popular brands to the lowest tax tier. This led to a massive increase in sales while slashing down the government’s tax revenues by 50pc.
Interestingly, the same officials who were responsible for the finance bill amendments were posted to the FBR.
The probe was launched on the directions of Minister for Finance Asad Umar who asked top officials to fix responsibility into the highly controversial scam.
Tasneem Rehman, Member Administration and a BS-22 officer of Inland Revenue, is heading the probe.
An official source told Dawn that the finance minister was unhappy with the pace of the probe into the multi-billion rupee scam launched at various forums. This will be the fourth probe so far launched into the scam, the official said, adding the new government has yet to consider the recommendations of the previous probe.
Interestingly, the causes of revenue loss have been determined by the FBR to an extent. However it has yet to take action and fix responsibility in the light of recommendations of the previous probe.
The Senate Standing Committee on Finance has also constituted a special committee to probe the tobacco scam. The committee investigations are still under process whereas a couple of briefings were also held so far.
Meanwhile the National Accountability Bureau has also jumped in and started a probe into the scam to ascertain reasons for the decline in revenue collection from the tobacco sector. NAB will conduct the inquiry with a focal person in the FBR.
Official data shows that revenue collection from the tobacco sector fell to Rs74bn in 2016-17 from Rs111bn in the previous year 2015-16. The revenue further went down to Rs68.2bn in 2017-18bn, showing a steady decline in revenue collection from the sector.
Earlier in May, the Public Accounts Committee (PAC) had summoned chairman FBR after the board ignored its proposal to withdraw the third tier of taxes on cigarettes in the 2018-19 budget.
The FBR has retained the third tier and set aside stakeholder recommendations calling for the restoration of a two tier tax system, even though the PAC believed that the new system was causing low revenue collection from the cigarette industry.
A PAC investigation has been completed and submitted a special audit report on the causes of decline in tax collection of tobacco sector. The report was submitted on Sept 12.
Key findings of the report suggest that the decision to include 3-tier with lower FED has not only promoted smoking by 23pc but also resulted in loss to the tune of Rs50bn to Rs60bn to the government exchequer.
The issue of weak enforcement mechanism to stop illegal production of cigarettes which contributed one fourth of the total market was also highlighted in the report. The report also suggested constitution of a high-powered committee to investigate facts and figures contained in the report.
According to the PAC report, reduction in price due to the three-tier system has actually promoted smoking in the society. “Before price reduction, 23pc smokers were using less than 5 cigarettes a day. But after price reduction that number declined to only 1pc. This means increase in tobacco use causing serious health hazards in the society,” added the PAC report.
Published in Dawn, November 4th, 2018