The share of illicit cigarettes has exceeded expectations and is estimated to touch the Rs300 billion mark in tax evasion for the outgoing fiscal year, compared to the legitimate industry’s contribution of Rs265 billion in tax payments.
The share of illicit cigarettes has exceeded expectations and is estimated to touch the Rs300 billion mark in tax evasion for the outgoing fiscal year, compared to the legitimate industry’s contribution of Rs265 billion in tax payments.
The total volume of the cigarette industry stands at 81-82 billion sticks in the country, but it is the first time in the country’s history that the share of illicit cigarettes has risen to 58 per cent, while the legitimate industry, which includes two multinational companies -- Pakistan Tobacco Company (PTC) and PMI -- has shrunk to 38 per cent. It is a publicly known fact that 98 per cent of the taxes collected from the cigarette industry are paid by these two multinational companies.
With this evidence-based data, it is established that fiscal measures, even with effective enforcement, will never work in Pakistan, as the government hiked the Federal Excise Duty (FED) by 200 per cent, after which the share of illicit cigarettes increased manifold.
The volume of illicit cigarettes has grown along with changes in the structure of duty and taxes because there is a clear price differential. For instance, certain untaxed brands of cigarettes available are being sold in the market for less than the minimum retail price of any brand in the country.
The share of illicit cigarettes stood at 16.7 billion in FY2014-15, and the government was collecting taxes and duties of Rs 102billion. The share of illicit cigarettes rose to 26.9 billion sticks in 2015-16, and government collection stood at Rs114 billion. Now, with the introduction of a three-tier system, the share of illicit cigarettes experienced phenomenal growth and climbed to 46.8 billion sticks in 2016-17, and the duty and taxes collected by the government plummeted to Rs84 billion.
A recent study launched by IPSOS showed that the easy availability of low-priced smuggled and tax-non-paid cigarettes across Pakistan, non-compliance with the Track & Trace system, cigarette sales below the minimum legal price (MLP), price disparities, and numerous other crises have not only brought the compliant cigarette industry to its knees but have also dented the national exchequer with an annual loss of Rs300 billion.
Around 104 cigarette brands were being sold below the MLP, while 45 smuggled brands were being sold above the MLP. The study noted that: "53 per cent of the cigarette brands available in the market are being sold below the MLP".
Another international research conducted by the Transnational Alliance to Combat Illicit Trade (TRACIT) also found that Pakistan’s national treasury was losing Rs700 billion per annum due to illicit trade.
Given such a mammoth loss to the national exchequer, the FBR has been left with no option but to make a conscious decision to establish an enforcement force with the mandate to plug leakages of Rs300 billion. There are some proposals under consideration at the moment, but there is a need for political will to convert these proposals into actionable measures to curb the menace of illicit cigarettes in the country, which is causing a heavy toll on the national exchequer on an annual basis.
The writer is an Islamabad-based journalist.
