Pakistan Tobacco Company Slashes Production as Sales of Illicit Cigarettes Grow

Pakistan Tobacco Company (PTC) is likely to close down its manufacturing unit in Jhelum, top company officials told reporters on Saturday at the company’s Jhelum factory.

Out of 10 production machines, eight production lines in Jhelum have been closed and the company is working with a minimum capacity of two machines. The company will also re-export four of its machines in its manufacturing units owing to the loss of sales volume by the legitimate industry.

The company is likely to shut down if the current situation continues in the coming days, PTC officials added. The representatives of the company shared that a steep decline in the volume of the legitimate industry and a sharp increase in the sales of illicit cigarettes are being witnessed.

The exorbitant increase in federal excise duty (FED) in February this year coupled with the lack of enforcement has amplified the sale of illicit cigarettes including the duty not paid (DNP) and smuggled cigarettes.

As per recent data by the Pakistan Bureau of Statistics (PBS), volumes produced by the legitimate Tobacco Industry declined by 50 percent in March, which is the first month of sales after the excise increase, whereas, the total large-scale manufacturing (LSM) decline was half of the tobacco industry at 25 percent.

This impact has also been witnessed throughout the year, whereas, during the period June 2022 to March 2023, the legitimate tobacco industry suffered a huge loss in production of 24 percent, three times the size of what the LSM sector witnessed, the officials highlighted.

This impact has led to the down-trading of consumers from legitimate cigarette brands to tax-evaded cheaper options, which are locally manufactured DNP cigarettes and undocumented, smuggled cigarettes. Since January 2023, the volumes of non-duty paid cigarettes and smuggled cigarettes have shot up by 32.5 percent and 67 percent respectively. This has led to the illicit sector growing to upwards of 42.5 percent of the total market.

In 2022-23, the share of the legitimate tobacco sector was 41.4 billion sticks while the illicit sector’s share was 41.6 billion sticks. However, after the recent hike in FED on the tobacco industry, it is projected that the share of the legitimate tobacco sector in 2023-24 will be 29.6 billion sticks while the illicit cigarette share will reach 53.4 billion sticks in 2023-24. This means that 11.8 billion sticks will shift to illicit cigarettes.

Dispelling the impression that the illicit cigarette industry share is only 9-18 percent, PTC officials said that the figures have no relevance. All these figures are neither authentic nor backed by any actual market research.

Qasim Tariq, Senior Business Development Manager, shared that because of a more than 200 percent increase in excise in February 2023, it will be the first time in the history of the country that the tax loss caused by the illicit sector in the fiscal year will be more than the legitimate industry’s contribution to the national exchequer. If the current fiscal regime prevails, damage to the national exchequer, as well as the legitimate industry, will be immense and hard decisions will have to be taken.

A key initiative to curb illicit trade was the implementation of Track and Trace in the tobacco industry, however, despite multiple directives by the prime minister for across-the-board implementation of Track and Trace nationwide, it remains a distant dream.

Tariq shared that the company has informed the Federal Board of Revenue (FBR) that it is exploring the option of re-exporting four of its machines in its manufacturing units owing to the loss of sales volume by the legitimate industry.

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