PHC Rules Excise Duty on Hand-Stemmed Tobacco Illegal
The Peshawar High Court has ruled that federal excise duty cannot be imposed on green leaf and hand-stemmed tobacco unless it has been processed and converted by a green leaf threshing (GLT) unit.
A bench of Justice Syed Arshad Ali and Justice Mohammad Faheem Wali gave the ruling in a 29-page detailed judgement. The bench disposed of 14 petitions filed by tobacco growers, tobacco companies and GLT units.
The petitioners had challenged the levy of federal excise duty (FED) on hand-stemmed tobacco, the sealing of their warehouses and godowns, and the confiscation of un-manufactured tobacco and machinery.
Premises to be de-sealed, stocks released
The court directed the authorities to release the seized tobacco, vehicles, equipment and records and to de-seal the premises and machinery at once. It set aside show-cause notices and orders imposing FED on such tobacco, and compulsory registration notices issued on the ground that hand-stemming amounted to manufacturing.
The bench ordered the release of 3,375 kilograms of hand-stemmed tobacco and a vehicle belonging to Pak Hills Tobacco Company, while setting aside the FED demand on that consignment.
It also set aside a show-cause notice demanding FED of Rs123.992 million from Royal Tobacco Company, ordered its godowns de-sealed, and the release of 628,145 kilograms of hand-stemmed tobacco and 130,000 kilograms of green leaf tobacco.
Hand-stemmed tobacco: why the court ruled as it did
The court held that green leaf tobacco and hand-stemmed tobacco, which had not undergone processing and conversion through a GLT unit, did not fall within the definition of “unmanufactured tobacco” under Section 2(24A) of the Federal Excise Act, 2005.
“Consequently, such tobacco is not liable to FED under Section 3 of the Act,” the bench ruled.
The bench found that hand-stemming, even when carried out with tools or machinery, could not by itself be treated as a manufacturing process to justify the levy.
The petitioners’ lawyers, Ishtiaq Ahmad and Isaac Ali Qazi, argued that hand-stemmed tobacco remained a constitutionally protected agricultural produce exempt from federal taxation, and that the levies and search warrants were illegal and unconstitutional.
The assistant attorney general, Bilal Ahmad Durrani, and lawyers for the federal finance ministry and the Commissioner Inland Revenue argued that an earlier judgement had held the levy on unmanufactured tobacco to be constitutional. They said the petitioners had presented large-scale commercial processing from undeclared godowns as an exempt farming activity, while the law brought drying, cutting and threshing within the definition of manufacture, attracting an adjustable FED of Rs390 per kilogram.
The bench disagreed. It noted that “unmanufactured tobacco” was defined for the first time through the Finance Act, 2018, which inserted Clause (24A) in Section 2 of the Act. Under that provision, the term means tobacco usable for making cigarettes, as manufactured by GLT units after processing and conversion of green leaf tobacco.
What happens next
The ruling does not end all proceedings. Where the authorities maintain that seized stock was processed by a GLT unit, they may retain the identified goods for up to 15 days to pass a reasoned order, after giving the affected party a hearing.
Any remaining proceedings on sales tax, penalties or confiscation are to be decided under the law. The authorities may also start fresh proceedings if material shows that a person was operating a GLT unit.
The decision matters for the tobacco trade in Khyber Pakhtunkhwa, where tobacco growing and curing support many farming families and small businesses.
The ruling lands as the FBR presses ahead with a wider tax drive. The board has revised property valuation rates in Islamabad and Abbottabad and set out plans to abolish the super tax. Its teams have also seized cigarette cartons in Bahawalpur, and the board has made advance-payment invoices mandatory for sales-tax registered businesses.
What did the court decide?
Federal excise duty cannot be imposed on green leaf or hand-stemmed tobacco unless it has been processed by a green leaf threshing unit.
What is a GLT unit?
A green leaf threshing unit processes and converts green leaf tobacco into unmanufactured tobacco usable for making cigarettes.
How much tobacco must be released?
Royal Tobacco Company: 628,145 kilograms of hand-stemmed tobacco and 130,000 kilograms of green leaf tobacco. Pak Hills Tobacco Company: 3,375 kilograms of hand-stemmed tobacco, plus its vehicle.
Does the ruling end all tax claims?
No. Sales tax, penalties and confiscation proceedings are to be decided under the law, and the authorities may act afresh if a GLT unit was in operation.
