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Revenue Board asks cigarette makers to submit cost structure

ISLAMABAD (January 29 2003) : The Central Board of Revenue (CBR) has directed the cigarette manufacturers to submit the cost structure of all brands of cigarettes to ascertain the genuineness of the prices being charged from the consumers, as according to Central Excise authorities, there is a built-in evasion of duties and taxes on prices declared by some of the cigarette manufacturers.

The issue came to the limelight in a recent meeting of Member Central Excise Naseer Ahmed, Cigarette Manufacturers Association of Pakistan (CMAP), tax collectors and Director General Intelligence and Investigation, Customs and Excise, Major General Syed Usman Shah (Retd).

A top excise official conveyed his observation to the representatives of M/s Pakistan Tobacco Company, Islamabad, and Lakson Tobacco Company, Karachi, that cigarette manufacturers are declaring prices in fraction eg price of Gold Leaf (20 HL) has been printed on the pack as Rs 35.52 but it is not sold below Rs 37 by the retail traders, showing a built-in evasion of duty and taxes. Since least transaction currency is one rupee, price should be rounded off to avoid evasion of duty and taxes.

On the other hand, tax collectors opined that the reason of difference in retail price printed on the pack and that charged by the retailer is due to additional 3 per cent sales tax, which is being charged by the distributor/dealer from un-registered retailer and the same is reflected in the price charged by the retailer.

Therefore, there is no element of tax evasion on this account.

However, there is a margin of overpricing even if sales tax is calculated at the rate of 18 percent.

The tax collectors informed that some cigarette manufacturers are declaring price of 10 cigarette pack to the extent of Rs 2.10 and adding central excise duty and sales tax to their cost, which comes to Rs 4.63.

The representative of a cigarette manufacturing giant pointed out that some cigarette manufacturers are selling their brands on a price as low as Rs 4 despite the fact that price printed on their packets is Rs 5.56.

The tax element on 20-cigarette pack comes to Rs 4.80, and it is not possible that any cigarette brand can be sold on such a reduced price.

The CBR should device a procedure wherein cigarette manufacturers are bound to declare cost structure so that non-duty paid/short-duty brands could not be brought in market.

It was decided that the CBR would obtain cost structure of all brands of cigarettes and analyse with the help of Cigarette Manufacturers Association so as to ascertain genuineness of the declarations.

The CBR has also directed the cigarette manufacturers to provide complete detail of factories located in Azad Kashmir and check non-duty paid cigarettes being supplied by Azad Kashmir cigarette manufacturers.

For this purpose, doubtful consignments be seized and reports be prepared so that the matter may be taken up with the government of Azad Kashmir.

The authorities also agreed to conduct a countrywide survey through independent organisation to ascertain quantum of smuggled/counterfeit cigarettes in the market.

Cigarette industry should print serial number on their packets so that counterfeit and smuggled products can be checked under the excise laws, they added.

Criticising the role of self clearance system in tax evasion, the authorities proposed that cigarette manufactures should revert back to supervised system to eliminate the possibility of evasion of central excise duty (CED).

Sources said that the second most important issue raised in the meeting relates to the increase in the smuggling of cigarettes from China and Korea and manufacturing of counterfeit cigarettes and tax evasion in unorganised sector, which has affected the volume and revenue of the cigarette industry.

The Collector, Sales Tax and Central Excise, Peshawar, submitted that the Sales Tax Act has not been extended to Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (FATA), which caused enforcement difficulties.

The cigarette manufacturers should supply list of both registered and un-registered dealers/distributors of settled as well as FATA/PATA so that some enforcement measure may be taken.

It was decided that the association would supply list of dealers/distributors/whole-sellers whether un-registered or registered to the Peshawar Collector.

The cigarette manufactures stated that the industry was forced to reduce prices in March 2000 to combat evasion.

The prices were increased three times during the last 12 months ie July 2001, October 2001 and July 2002.

The evasion was reduced to 5 per cent in August 2001. The current level of evasion is over 20 per cent and is increasing.

The cigarette industry is facing declining volume due to decrease in revenue, however, Azad Kashmir and Mardan brands have not changed their prices for the last 10 years.

Responding to a query, Collector Peshawar stated that he has personally visited the Mardan units and five units have promised to increase revenue to the extent of 20 percent per month.

Similarly, the survey of Bara markets was also instrumental in enhancing excise duty from units located in these areas.

Five cigarette units located in Bara have paid excise duty to the tune of Rs 1,40,000 during the first six months of the current financial year against Rs 78,000 in the corresponding period of last fiscal.

The custom authorities stated that mis-declaration cases could be made against the cigarette manufacturers under the existing law.

They emphasised that cigarette industry should help CBR through information sharing about smuggling and counterfeit cigarette brands to effectively enforce the law.

The manufacturers submitted that some units have installed machines but their manufacturing do not match with the investment and installed capacity.

They suggested to devise a mechanism whereby tax liability can be determine with reference to installed capacity.

However, tax collectors contested that the production capacity system has been done away with in 80s and it could not be reverted back.

The CBR asked the leading manufacturers to supply the list of units, their addresses and details about installed machinery.

The cigarette manufactures observed that the evasion of CED could be effectively checked by controlling the movement of tobacco in suspected areas.

Major General Syed Usman Shah (Retd), Director General Intelligence, informed that the smuggling of cigarettes from China by road is not significant. Bulk of smuggling is taking place through sea.

Intelligence agencies have been directed to identify the route used for this purpose and cigarette industry should share information about these smuggling routes, he added.

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