Illicit cigarette trade to surpass tea in grey market

LAHORE: Illicit cigarettes hold a 40 percent share in the total cigarette market in Pakistan, making the country the second largest in illegal cigarettes among Asian countries following Malaysia that holds a 50 percent share.

According to the IPSOS study ‘report of tax evasion on 5 sectors of Pakistan’, tea leads illicit trade, followed by cigarettes. However, it is expected that with the recent hike in duties and taxes on cigarettes by the federal government, the sector would leave tea behind tea.

The new tax regime has further protected local companies, while putting the entire tax burden on multinationals, which already account for 98 percent of cigarette taxes. Interestingly, the Federal Board of Revenue (FBR) chairman in a recent meeting, assured the Senate Standing Committee on Finance that the FBR has provided protection to local cigarette companies in terms of federal excise duty hike.

Senator Dilawar Khan, who is a member of this committee, is the owner of a local cigarette company.

Currently, total tobacco consumption of Pakistan is around 80 billion cigarette sticks, out of which the local tax evading companies are selling around 32.6 billion sticks, which inflict a loss of Rs80 billion in revenue on the exchequer.

The sales of these illegal tax evading cigarette companies have increased with the new federal excise duty and tax rates. These illegal cigarette brands become increasingly attractive to smokers due to the vast price differential.

Smokers, who cannot afford the higher price of legal cigarettes and are unable to quit smoking, are rapidly switching to these local no duty and taxes paid cigarettes.

According to an expert, the government is jeopardising the existence of the documented cigarette companies, which pay billions of rupees in taxes, with the imposition of a separate policy for local and multinational companies.

“With such a large proportion of illegal cigarettes, it is false to claim that Pakistan has imposed a lower tax on cigarettes than the WHO recommended rate because only two companies’ bear the entire tax burden,” the expert said.

In countries with high taxes on cigarettes, the market share of illegal cigarettes is negligible, while the per capita income in these countries is also higher than in Pakistan, so it is wrong to include Pakistan in countries with high taxes on cigarettes.

Tax experts believe that the government’s responsibility is to provide equal business opportunities to all the players in any segment of the industry, rather than to create distortions which benefit any one player. Taxes should be applied equally to all cigarette manufacturers to stem the trend of rapidly declining legal cigarette sales, the experts said.