The flood of smuggled cigarettes that hit Pakistan after the stellar tax hike brought by a minibudget a few months ago continues to surge, allowing black market forces to prey upon legitimate business and depriving the national kitty of previous revenue. In other words, here is a black market boom cultivated by the government.
The flood of smuggled cigarettes that hit Pakistan after the stellar tax hike brought by a minibudget a few months ago continues to surge, allowing black market forces to prey upon legitimate business and depriving the national kitty of previous revenue. In other words, here is a black market boom cultivated by the government.
The government took the rather extreme measure of increasing the Federal Excise Duty (FED) on taxpaying cigarette brands by 154 percent in view of its dire revenue needs against the backdrop of negotiations with the International Monetary Fund (IMF) for a bailout package.
But the move seems to have backfired in a spectacular way. Their prices hiked outside the reach of most smokers because of the new taxation regime, taxpaying cigarette brands are losing market share to the ubiquitous tobacco black market.
Sneaked in through the country’s porous border with Afghanistan, smuggled cigarettes end up at the same retail outlets that sell legitimate taxpaying brands, and are now irresistibly cheaper than the taxpaying Pakistani brands.
The upshot is that more and more foreign brands are entering the local market through smuggling, which has now become more lucrative than ever because of the heftier profit margin enabled by the 154 percent FED.
Mr. Tariq, who has been a habitual smoker for the last 30 years, said that he has switched to a (smuggled) foreign brand for the first time because of the massive price increase brought on by the minibudget. He said smuggled cigarettes are freely available everywhere.
Observers say Pakistan’s cigarette smuggling has surged by 200 percent in recent months, and many newer brands have appeared on the market. Data suggests that in the aftermath of increased FED by 154 percent on domestic brands, The number of smuggled packs of cigarette brands crossed the psychological mark of 100 brands which earlier stood at around 20 to 25 brand packs. Industry experts say that at least 70 new smuggled brands were flooding into the Pakistani market because of massive increases in domestic prices in the aftermath of the hike in FED, providing incentives to smuggled brands for increasing their penetration in our domestic market.
For good or for bad, Pakistan’s legitimate tobacco market is dominated by two giants with international linkages: Pakistan Tobacco Company and Philip Morris Pakistan. The PTC contributes 82 percent of the government’s revenue from the sector, while Philip Morris contributes 16 percent. All other domestic players contribute only a 2 percent share in the shape of taxes to the national exchequer.
Observers say plummeting sales of Pakistani cigarettes are an indication of the losses the national exchequer is stacking up in terms of tax collection. There is also a need to fully analyze the prevailing dynamics regarding the tobacco sector in Pakistan.
Multilateral financial institutions such as the IMF and the World Bank remain unable to comprehend the Pakistani market mainly because of possessing only experience of the developed or Western world.
In Pakistan, there are three major types of cigarettes causing losses to the national exchequer. The first and foremost one is Duty Not Paid (DNP) as these are locally manufactured cigarettes with certain characteristics such as hiding their actual production, evading paying duty and taxes, selling below the minimum price and minimum tax, and establishing their production units usually in areas which are outside the normal taxation regime prevailing in Pakistan. For instance, their production facilities are located in Azad Jammu & Kashmir (AJK).
The second type is counterfeit cigarettes as these are just copies of original brands, in similar packaging but of poor quality. These are usually sold at transitory places such as Railway Stations or Bus Stops, and they also have fake tax stamps.
The third one has smuggled cigarettes, which have recently become a growing phenomenon in Pakistan mainly because they are now priced below tax-paid cigarette brands. Cigarettes of these brands are sneaked into Pakistan mainly through the Afghan border.
These smuggled cigarettes do not comply with statutory requirements, evade duty and taxes, display no health warnings at all, and show no tax stamps, indicating that this pack never bothered to pay any penny into the national kitty.
All three categories are causing losses to the national exchequer. Prime Minister Shehbaz Sharif has recently decided to take stern action against the recent surge in smuggling. There is a need to remind the FBR that smuggled cigarettes became another sector that witnessed a 200 percent increase under the tight nose of customs authorities in recent weeks and months. So proper vigilance and enforcement are required at borders and entry and exit points to ensure a reduction in smuggled cigarettes.
At a time when all three categories of illicit cigarettes, namely Duty Non-Paid, counterfeit, and smuggled, have witnessed an increase in sales, the ultimate victim will be the tax collection target of the FBR envisaged for the current fiscal year.
The FBR has been eyeing to fetch over Rs200 billion after the 154 percent hike in the FED through a recent minibudget. In total, the government slapped over 200 percent duty and taxes on this sector in the current fiscal year.
The FBR has so far collected Rs 97 billion in the first nine months (July-March) period of the current fiscal from the giant company Pakistan Tobacco Company (PTC) against Rs 85 billion in the same period of the last financial year.
Now it’s projected that the FBR would collect Rs 135 billion in the current fiscal year ending on June 30, 2023, against Rs 121 billion collection in the last financial year 2021-22.
Finally, the government will have to strengthen the law enforcement agencies deployed at bordering areas by increasing the workforce of an anti-smuggling squad of the Customs department in the FBR and establishing close liaison and coordination with other law enforcement agencies to discourage smuggled items from coming into Pakistan.
The FBR argues that the smuggled cigarettes are not being transported in bulk, i.e., by truckloads or container loads. Rather, the methodology adopted is to carry some cartons in buses and other vehicles. These are then dumped at certain places and then carried to markets.
The FBR’s Customs authorities have been intercepting buses and raiding storage places and godowns in markets. Last month, Customs intercepted a vehicle involved in this kind of smuggling at GT Road in Peshawar.
The owner and carrier of the goods could not produce any relevant legal document as the lawful import document. The goods were recovered and seized as per the applicable law. The consignment comprised 714 (ten-pack) sticks of various brands 168, estimated to value Rs 3.5 million on the market.
The cigarette brands seized included Mond, Gold Line, Pine, Seven Stars, Esse, Milano, and Davidoff. In another incident, the Collectorate of Customs Enforcement, Karachi raided godowns in Bolton Market and recovered 1.12 million sticks of smuggled foreign-made cigarettes of assorted brands valued at Rs. 19.1 Million - in addition to Indian gutka and smuggled cosmetics worth millions.
While these look like brave efforts at law enforcement, the way smuggled cigarettes are available everywhere clearly means they are no match for the magnitude of the problem. The government must upscale enforcement action and bring punitive action to a level where it actually deters smugglers and traders in smuggled cigarettes.
