Pakistan continues to be robbed of billions of rupees due to the illicit trade in the tobacco sector.
According to the official data available with ProPakistani, around 80 to 85 billion cigarettes are sold in Pakistan each year, and with the illicit cigarette incidence at 34.7%, Pakistan ranks as the number one country across Asia in terms of the quantum of illicit cigarettes sold annually.
Estimates indicate that the share of illicit cigarette trade has ballooned over the past few years to as much as 40% and illicit cigarette trade alone results in a loss of Rs. 44 billion annually.
Most countries face the issue of illicit cigarette trade in the form of smuggled cigarettes whereas in Pakistan, not only is there an issue of smuggled cigarettes but also locally manufactured, counterfeit, or under-priced cigarettes as well. The differential as per different researches varies between 100-111% in the Pakistani market.
For years, law enforcement agencies and the people involved have played cat and mouse. There are no sustained enforcement efforts and the flow of non-duty paid cigarettes from AJ&K as well.
Last year, Prime Minister Imran Khan had directed the Federal Board of Revenue (FBR) to launch a crackdown on the sale of illicit cigarettes. The premier had taken serious notice of the situation and asked that a countrywide crackdown be launched to curb the sale of illicit cigarettes.
While a lot of effort is being made, illicit cigarette trade continues to grow and thrive. This implies that the illicit cigarette traders are using all means possible to circumvent and undermine the enforcement efforts of the government.
A structured approach needs to be taken which can have sustained and definite results. This will not only create a level playing field for the compliant businesses in Pakistan but will also increase government revenue which can be put to good use.
Taking measures for the elimination of illicit trade is a Framework Convention on Tobacco Control (FCTC) protocol. There is no interest from Anti-tobacco activists and the Ministry of Health on illicit cigarettes which is the biggest threat to tobacco control (discounting, advertising, etc).
As per estimates, curbing illicit trade in the country alone has the potential to add Rs. 44 billion to the government’s revenue in excise and taxes.
Sadia Dada, Director Communications, Philip Morris (Pakistan) Limited told ProPakistani,
Over the past decade we have invested in excess of USD 800 million in Pakistan however we continue to face challenges on the illicit tobacco trade which not only negatively impacts our business but also government revenues and the economy as a whole. As per a survey, this alone has the potential to add Rs. 44 billion to the government’s revenue in excise and taxes – so instead of illegal trade profiting, this can be put to good use by the government on much-needed measures. We appreciate the steps being taken by the government in this regard but we also feel that there is a lot more that can be done to create a level playing field for the compliant businesses in Pakistan.
She added that the industry is already paying massive taxes and it is impossible for it to bear any further taxes in the current scenario, when illicit and untaxed cigarette industry is penetrating the market
The two compliant tax-paying companies, Philip Morris Pakistan and Pakistan Tobacco Company have contributed approximately Rs. 113 billion ~USD 726 million in excise duties and taxes during the fiscal year 2018-19 constituting 98% of the cigarette excise revenue whilst having 67% of the market. The Prime Minister of Pakistan has also acknowledged this fact on various occasions including his 100-day speech.
Govt revenues generated from tobacco, which are already on the decline as we can see from the results, may decline further if there are additional taxes on the sector in upcoming budgets as higher taxes would likely result in a further decline in volumes of the legitimate sector and accelerating the prevalence of illicit trade.
This could have a serious impact given the current economic crisis due to the pandemic and threaten livelihoods associated with the tobacco sector.
There is a major price differential between the tax compliant brands that legally cannot be less than Rs. 63, whereas there are brands available in the market for as low as Rs. 25-30. The compliant tax-paying cigarette industry faces challenges from the illicit tobacco sector, currently estimated at 34.7% of the total tobacco market (Dec 2019 – Retail Audit).
This is mainly attributable to the two excise tax increases (56% aggregate) in 2018, stretching the price gap between illicit and legally compliant tax-paying cigarette industry.
According to sources, the size of the illicit trade in Pakistan has been subject of much debate. Traditional and conservative estimates often rely on a very narrow definition of illicit limited to one of the following – Absence of retail price or government-mandated graphic health warning and manufacturer’s details on the pack.
Some also count packs that don’t have the retail price and GST on them as illicit. Unfortunately, this is a very small portion of the problem. The much larger and unique problem Pakistan faces is that of non-tax-paying locally manufactured cigarettes that may have the legal retail price written on them but their street price is sometimes as much as half of what is printed on the pack
Moreover, Federal Budget 2019/20 abolished the mid excise tier while imposing a further 32% increase in the excise rates of the value tier, which further widened the price gap.
Illicit trade in tobacco products presents a threat to tobacco control because it undermines the use of tax and price policies. Whilst, in theory, higher taxes can potentially have an impact on consumption, despite the excise increases, the total consumption of cigarettes in Pakistan continues to remain constant over the past 5 years at 80 to 85 billion sticks per annum.
It is to be noted that the current situation caused by the COVID-19 crisis has the potential to lead to a lasting transformation. The economic difficulties caused by the COVID-19 crisis may affect people who are already in a position of socioeconomic disadvantage harder than others.
This could lead to an increase in the number of people resorting to illicit trade of tobacco as illegal sellers are already selling the smuggled cigarettes in the market at a higher price with no taxes.