Illegal cigarette trade on the rise

ISLAMABAD: At least 13 government agencies and 25 laws have failed to curtail massive thriving of illicit trade of cigarettes of smuggled and locally manufactured tax-evading brands, with the annual revenue loss shooting up to Rs24 billion due to this illegality, according to conservative estimates.
This unlawful business has a whopping 23.7 percent market share in the cigarettes sold in Pakistan. But it contributes just 0.7pc of the total revenue, collected from the cigarette industry, research studies show.
The two main players of the tax-paid segment of the cigarette industry, having 76.3pc market share, dominate the revenue collection, contributing over 99pc of the total annual revenue, received by the government, under this head.
Of the Rs124 billion revenue target set by the Federal Board of Revenue (FBR) for the year, one main manufacturer of cigarette is paying Rs90 billion while the second biggest producer is disbursing the remaining Rs34 billion.
A source said that weak enforcement of laws has led to 43.5pc growth in illicit trade over the past six years. Pakistan stands on fourth position in Asia in terms of share of illicit segment in the overall consumption of cigarettes in the country.
Over the years, the government has put in place a robust regulatory regime intended to cut back illicit cigarette trade, which prescribes strict laws regulating virtually every step of the industry supply chain, he said.
They include laws and rules controlling crop buying, procurement and use of raw materials, manufacturing, transportation and distribution, and finally import and retailing of tobacco products. Despite this comprehensive regulatory framework, illicit segment occupies almost a quarter share of the overall market, which shows that the enforcement of fiscal and regulatory laws is the real hurdle in curtailing the illegality.
According to available authentic statistics, nearly two billion cigarettes are annually smuggled into Pakistan while over 17 billion sticks, described as local tax-evaded (LTE), were sold in the country in 2014. Of over 20 billion cigarettes illicitly sold in Pakistan, 89pc are LTE.
The studies conducted by leading international research agencies, including Nielsen, Euromonitor International, ITIC & Oxford Economics and KPMG UK, say the average share of illicit cigarettes in overall Pakistani market is 23.8pc; annual volume of illicit sales is 20 billion sticks; the LTE share is 85pc and the share of smuggled cigarettes in the unlawful business is 13.3pc while the revenue loss caused by this illegality is Rs22.55 billion.
According to Nielsen research, manufacturing and distribution of LTE cigarettes is not some covert operation. An elaborate and well-established supply chain is in place to ensure the availability of these products across Pakistan. Cigarette making is an elaborate process. Manufacturing and marketing of such a huge quantity of cigarettes (17.3 billion LTE sticks in 2014) certainly involved intensive operations involving buying of raw materials, its treatment, conversion into manufactured cigarettes, storage facilities and an elaborate nationwide distribution network.
These LTE cigarettes are extremely cheap. The average selling price of LTE brands is Rs27 per pack, which is far below the price, Rs33.8, of minimum tax-paid packet. Sale of cigarettes below the minimum applicable tax is itself clear evidence of tax evasion. On the other hand, most tax-paid brands are priced at Rs57 per pack. In the last four years alone, this price differential between tax-paid cigarettes and tax-evaded brands increased by 100pc. This growing gap is fuelling the growth of LTE cigarettes in Pakistan.
The study said that on average approximately one billion cigarettes are annually added to the illicit trade in Pakistan. In 2009, this quantity stood at 13.6 billion, in 2010 at 13.9 billion, in 2011 at 15 billion; in 2012 at 17.6 billion; in 2013 at 18.4 billion and in 2014 at 19.5 billion. Contrarily, the tax-paid volume of cigarettes consistently declined, which was 70.5 billion in 2009; 64 billion in 2010; 63 billion in 2011; 64 billion in 2012; 63.7 billion in 2013 and 62.7 billion in 2014.
The major markets of LTE cigarettes are Karkhano Bazaar, Peshawar, Nankari Bazaar, Rawalpindi, Pan Mandi, Shah Alam Market, Lahore, Chenab Bazaar and Chiniot Bazaar, Faisalabad, Choori Saraye Bazaar and Kup Bazaar, Multan, Jodia Bazaar, Karachi, and Main Bazaar, Quetta.
Sixteen pc of the tobacco crop produced annually is purchased by manufacturers of LTE cigarettes. The average annual tobacco crop production in Pakistan for the last five years was around 117 million kg. This means around 18 million kg of tobacco crop is annually purchased by the manufacturers of LTE sticks, although the same is not declared by them in order to avoid the tax net. One kg of tobacco crop is used for manufacturing of about 1,000 sticks. These 18 million kilograms of tobacco crop was thus enough for production of 17.3 billion of LTE cigarettes in 2014.
The main places of manufacturing illicit cigarettes are concentrated around Mardan in Khyber Pakhtunkhwa (KP) where some prominent political figures are the main players. Authorities fear to touch them due to their political connections otherwise cries of political victimisation will be everywhere.
The smugglers of foreign brand cigarettes are also playing havoc with the law. Not only any revenue is not being generated by this illegal business, even their packs carry no pictorial health warning, no Urdu health warning, no underage (under 18) warning, no name of manufacturer and no retail price, which are mandatory under the Pakistani law.
According to the Directorate of Intelligence & Investigation (Inland Revenue) of the FBR, the smuggled brands being sold in Pakistan include Pine with partial green background, Pine with partial white background, Camel, Mild, More etc.
The lucrative smuggling routes from Afghanistan to Pakistan are Torkham and Chamman borders, meaning this trade exclusively takes place through the war-torn, lawless country. The smuggled sticks reach Herat and Kandahar through the port of another neighbouring country or are flown to Kabul from a Middle Eastern state. The authorities, manning the Torkham and Chaman borders, need to be vigilant if the illegality that is costing Pakistan heavily is to be checked.
Cigarettes smuggled from Kandahar into Chaman are initially brought to warehouses in Quetta from where they are dispatched in regular quantities through cargo vehicles to Karachi and other destinations.
As per the Afghan Transit Trade Agreement under which goods are transported to the land-locked Afghanistan after unloading them at the ports of Pakistan, it is prohibited to bring cigarettes for transit to Afghanistan either by sea, land or air. The rationale behind this ban is the high incidence of transit cigarettes ending up in Pakistan without payment of import duties.
The research showed that approximately one out of every four cigarettes sold in Pakistan is illicit. This high prevalence of illicit trade is in sharp contrast to Bangladesh and Sri Lanka where such business has drastically declined over the years due to strict enforcement of law.
It said the tax-compliant segment of the cigarette industry faces unfair market competition whether it is in regulatory or in pricing matters. It is not possible to have fair competition with illicit segment, which sells at prices that are even below the minimum tax payable per pack or which violates the health warning and multiple other regulations. Due to these reasons, the sale of tax-paid segment are declining, which is resulting in substantial loss of the tax-paid segment in addition to the multiple other consequences for the government, people and consumers. In 2014, the tax paid segment suffered a loss of around Rs4 billion due to lost sales.