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Thursday, July 18, 2024

Tax Evasion Concerns Arise Over Philip Morris’ New Pricing Strategy

On August 9, the company unveiled its price list for various cigarette brands, drawing attention to the retail price of Marlboro Advance.

Philip Morris, a major player in the tobacco industry, has taken a bold step by adjusting the pricing of its Marlboro Advance brand to dip below the Federal Board of Revenue’s (FBR) federal excise duty (FED) rates. This calculated move has raised eyebrows, sparking discussions about its potential impact on market dynamics, consumer behavior, and government revenue.

Pricing Below Federal Excise Duty

On August 9, the company unveiled its price list for various cigarette brands, drawing attention to the retail price of Marlboro Advance. According to the Federal Excise Act, 2005 Schedule 1, item no. 9, the Federal Excise Duty (FED) for Tier 1 cigarette packets stands at Rs330. However, the published retail price for Marlboro Advance is notably lower than the prescribed FED.

Read More: Additional Taxes on Cigarettes and Tobacco

Notably, the listed retail price not only falls below the required FED but also, as per section 12, sub-section 4 of the Federal Excise Act, 2005, excludes additional charges such as production costs and other applicable taxes. This has led to allegations that the advertised retail price not only violates the minimum FED as stipulated by law but also omits the inclusion of production costs, potentially resulting in tax evasion and a shortfall in sales tax collection—higher retail prices typically attract an 18 percent sales tax.

Sources suggest that Philip Morris has previously contested FBR tax demands, with the tribunal ultimately ruling in favor of the company. While the company is reportedly prepared to cover the fixed FED expenses, there are indications that an attempt was made to market the brand at a retail price below Rs400 per packet. However, this approach could impact the collection of the 18 percent GST.

The Competition Commission of Pakistan (CCP) has affirmed that the FBR retains the authority to establish minimum retail prices for taxation purposes. In alignment with the Prohibition of Smoking and Protection of Non-Smokers Health Ordinance 2002, the Ministry of Health had previously prohibited the offer of free goods, cash rebates, samples, or discounts to promote tobacco sales or smoking.

Company Response and Compliance

A spokesperson for Philip Morris responded that the retail price of the brand aligns with the Federal Excise Act’s provisions. The company reportedly pays excise duty at rates outlined under serial number 9 in the First Schedule of the Federal Excise Act. The spokesperson emphasized the company’s adherence to legal regulations and expressed commitment to conducting business in accordance with national laws.

The company’s commitment to a smoke-free world contrasts with its activities in Pakistan, where its approach appears to center on promoting smoking affordability through discounts and potential tax-related strategies. This contradiction has drawn the attention of many observers.