Illicit cigarette sales spike after hike in excise duty

KARACHI: Sales of illegal cigarettes have spiked in Pakistan following a massive increase in federal excise duty (FED), according to Muhammad Zeeshan, Chief Financial Officer and Executive Director of Philip Morris (Pakistan).

In an informal meeting with journalists in Karachi, Zeeshan expressed concerns that the government’s recent decision to impose additional taxes on various products, including cigarettes, has led to a widening gap in taxes between legal and illegal cigarette sales. He said that whenever the tax on legal cigarettes increases, the sale of illegal cigarettes also increases.

Pakistan has become the second-largest country in Asia in terms of the sales of illicit cigarettes, following Malaysia. However, he said that without curbing illicit cigarette trade, increase in FED would never be effective as the entire burden of taxes was borne by the organised and legal cigarette industry.

He urged the government to apply laws uniformly to the entire industry, implement track and trace across all companies, and provide a business environment in which an organised tax-paying industry can thrive.

Zeeshan also stated that the impact of this significant increase in excise duty has started to set in on the legal cigarette industry, and the government itself will face the negative impact of this move in the form of reduced tax revenue from cigarettes.

Statistics for the first quarter prove that the sale of legal cigarettes has declined by 50 percent, whereas, as in the past, the increase in excise duty is benefiting illegal cigarettes. The recent increase in excise duty has doubled the price difference between legal and illegal cigarettes.

With the rapid increase in illegal sales, it is estimated that the government would not be able to achieve the tax collection target of Rs260 billion from the tobacco industry. The decrease in legal cigarette sales will result in a meagre collection of Rs170 billion, a figure that the government can easily observe by analysing the taxes collected in March.