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Fixed tax agreement between CBR, 6 cigarette manufacturers

  1. Captive power plants
  2. Fixed tax for 6 cigarette manufacturers
  3. Privatization of Railways by Dec. 2000

Pakistan Tobacco and Lakson Tobacco to suffer due to new system

By Syed M. Aslam
Sep 27 - Oct 03, 1999

An agreement signed by the Central Board of Revenue (CBR), the premier tax collecting agency, with the six Mardan-based cigarette manufacturers to pay a fixed monthly taxation, will give them an unfair edge over two other major cigarette manufacturers who collectively paid over Rs 17 billion in duties and taxes to the exchequer last year.

According to sources, the CBR signed an agreement with six companies— Souvenir Tobacco, Saleem/Universal Tobacco, Imperial Tobacco, United Tobacco, Sarhad Tobacco and Excel/Khyber Tobacco— on October 27, 1998. The agreement comprised of a minimum monthly payment schedule per month for each of the six manufacturers which totalled Rs 31.667 million all together.

As of the first of July this year, sources told PAGE, the agreement was implemented and would be good till June 30 next year. According to details provided to PAGE, Souvenir and Saleem/Universal Tobacco, owned by the same person, are required to pay Rs 7.584 million and Rs 6.884 million as tax each month under the agreement. The minimum monthly payment paid by the other four companies is: Imperial tobacco, Rs 6.884 million; United Tobacco, Rs 3.984 million; Sarhad Tobacco, Rs 3.431 million; and Excel/Khyber Tobacco, Rs 2.9 million.

The two major cigarette manufacturing and marketing companies of Pakistan— the Pakistan Tobacco Company (PTC) and Lakson Tobacco Company, which collectively enjoy over 90 per cent share of the national market — will be the worst hit by the agreement signed between the CBR and the above six companies.

A highly placed source in the tobacco industry, who requested PAGE not to mention by name, questioned the discriminatory fixed taxation allowed to these six manufacturers adding that it undermines the very basis of the level playing field for the two major tax and duty contributors to the exchequers.

The fixed taxation granted to these six companies would allow them exemption from the Central Excise Duty (CED) which for the two major manufacturers come to an average of 60 per cent. In addition, it would also allow the former an undue exemption in lieu of sales tax which are being levied on PTC and Lakson.

The source expressed fears that uneven playing field would result in reduced sales volume for both the PTC and Lakson Tobacco due to the wholesale dumping of products by the six beneficiaries of the fixed taxation at the ultimate loss of revenue to the government.

He asked about the legitimacy of the two sets of taxation, basically the CED which helps the government earn an unmatched amount of revenue for the government from the two manufacturers particularly when the fixed monthly taxation from the six Mardan-based beneficiaries would help government earn just Rs 380 million annually, he added.

Criticizing the two sets of CED for the tobacco industry he said that any reduction in sales of PTC and Lakson would also reduce the revenue from the sales tax for the government as in addition to the 63 per cent CED the government would also lose 15 per cent sales tax which also comprises the retail price of cigarettes.

He asked the government to reconsider its decision to allow two sets of CED which is discriminatory against the payers of two major duties and taxes and also the sales tax collectors which contribute such massive revenue to the exchequer.

It is significant to see that despite a significant improvement in sales which increased 15 per cent to Rs 7.9 billion and operating profit which increased by 85 per cent to Rs 181 billion during the half-year ended June 30 this year over the corresponding period last year the PTC suffered a post-tax loss of Rs 27.5 million and an after-tax loss of Rs 42.4 million. The company blamed it for the continued decline in real cigarette prices over the last few years .

The PTC increased the price of its premium selling brand, Gold Leaf which contributes 28 per cent in terms of production and 55 per cent in terms of sales, by over 12 per cent after the federal budget this year.

Industry sources told PAGE that the total cigarette market of Pakistan is around 59 billion sticks annually out of which between 85-90 per cent is shared by Pakistan Tobacco Company and Lakson Tobacco collectively.

A highly placed source at PTC told PAGE that the discriminatory taxation is feared to hurt the productivity of the company by a drastic two billion sticks this year. The absence of level playing field is feared to reduce the production from 22 billion sticks last year to 20 billion sticks this year the ultimate cost of which would be borne by the government which not only gets 63 per cent revenue primarily in CED plus 15 per cent sales tax, he added.

As , he added, in real terms there has been no increase in prices of cigarettes during last many years. For instance, the price of Gold Leaf has increased 38 per cent during last years or just 6.75 per cent annually which remains much lower than the inflation rate.

TABLE

Financial Performance of Pakistan Tobacco and Lakson Tobacco

PTC (Year ended 31.12.1998) Lakson (Year ended 30.6.1998)

Sales

Rs 14.25 Billion

12.20 billion

Duties and Taxes

Rs 9.40 billion

Rs 7.657 billion

Operating Profit

Rs 92.3 m

Rs 324 m

Actual Production

21.5 billion sticks

26 billion sticks