Heavy taxes on cigarettes will facilitate illicit manufacturers in Pakistan

The tobacco sector has been at the hit list for the government’s increasingly higher revenue collection needs, by paying higher taxes. The massive fresh strike of around 153 percent Federal Excise Duty (FED) rates on cigarettes is going to cause around a 250 percent increase in the prices of cigarettes, produced by legitimate companies. Apart from the major hike in prices of cigarettes, the supplementary finance bill, which was tabled in the parliament recently by the finance minister, also suggests increasing the sales tax. That coupled with the excise duty is more likely to boost the existing business of illicit cigarettes contributing nothing to the national exchequer.

It ought to be mentioned here that the Federal Board of Revenue (FBR), on Tuesday has notified the FED increase on expensive brands from Rs6.5 per cigarette to Rs16.5 – an increase of 153%. For less expensive brands, per stick increase is from Rs2.55 to Rs5.05 – an increase of 98%.

Reacting to the huge jump in FED, one of the major multinational tobacco firms in Pakistan, Philip Morris Pakistan Ltd, has claimed that the latest increase of FED on cigarettes by greater than 150% will result in a price increase of more than 250%, as compared to the prices of the cigarettes in financial year 2022 (Q1, 2022).

“The proposed unprecedented tax hike for the tax-paying tobacco companies will effectively favor the already vast illicit cigarette manufacturers in Pakistan. This will also lead to significant shortfalls in Government revenue as the volumes will massively shift from the tax-paid sector to the non-tax-paid sector, as it has often been seen in the past, “said spokesperson Philip Morris Pakistan Ltd in a statement.

As per the company, during the period 2019-2021 the FED increase was to the tune of 26%. During the current fiscal year 2022-23, FED on cigarettes was already increased by 25% in an earlier development.

According to cigarette industry sources, the legitimate industry has been very clear on the stance that excise led price increases give rise to the sales of the illicit cigarette sector which still continues to operate in Pakistan.

As per details, there are more than 200 illicit cigarette brands being produced by over 40 companies in KPK and AJK. These companies are selling their products in a price range of Rs 35 to Rs. 60 per cigarette pack. They continue to openly flaunt the minimum mandated price law, which clearly states that cigarettes cannot be sold for less than Rs. 70 per pack of 20 cigarettes. But because these companies are not under the radar of the government, they get away with the violation.

The legitimate industry on the other hand, has to ensure compliance to the fiscal law and increases the price of cigarettes, which results in consumers down trading from legitimate company brands to illicit sector brands. As a result, sales of illicit/undocumented brands increase. Currently, this loss is estimated at more than Rs. 70 billion/year according to various tobacco brands.

The industry sources believe the recent excise increases are detrimental to the legitimate companies’ survival as their sales decline; they are forced to shut down their manufacturing units and, in some instances, shut down their businesses from the country as well.

The government’s stance on the matter, however, has been consistent across political leaderships. Starting from 2018, “sin tax” was initially imposed on the consumption of cigarettes. The same stance has later been picked up in the times of a financial crunch.

As a product, the consumption of cigarettes results in huge sums of fiscal budget being allocated towards health, however, as producers, cigarette manufacturers have been some of the biggest benefactors of the national exchequer. Being an addictive substance, the somewhat inelastic demand of cigarettes, allows the government to make these changes. But like most issues, the case of cigarettes is trickier than a sweeping aim of public well-being.

“In Pakistan’s case, with the recent excise increase, if legitimate companies are forced to close, the government will lose more than Rs. 150 billion per year of revenue, more than 75,000 jobs will be lost directly and indirectly and last but not the least the loss from evasion by the illicit sector will increase to hundreds of billions of rupees,” said an office bearer of a cigarette producing company.

According to him, the government should first ensure that the measures being taken to counter illicit sector brands are firmly in place and are providing the right output e.g. track and trace has been implemented to counter illicit however, only 3 companies have implemented it, while 7 companies have gone to the court against it and the remaining have not implemented it on one pretext or the other.

Currently the legitimate sector holds 60 to 65% of the cigarette market share and pays more than 150 billion in taxes every year, while the illicit sector which holds 35 to 40% of the market share pays only Rs. 2 billion in taxes every year.

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