Tobacco industry calls for government to rethink excise duty hike

LAHORE: The documented tobacco sector is suffering a significant decline in sales, resulting in a loss of billions of rupees to the national exchequer, as the illegal cigarette market surges, a senior industry official said on Monday.

Muhammad Zeeshan, Chief Financial Officer and Executive Director of Philip Morris (Pakistan) Limited, expressed concerns about the escalating illegal cigarette market and its implications for government revenue.

"If the illegal cigarette market continues to rise as it did after the excise duty hike, the government will not be able to generate the anticipated revenue," he said. Zeeshan highlighted that the government had increased the Federal Excise Duty (FED) by 200 percent in the current fiscal year.

As a consequence, Philip Morris (Pakistan), one of the two documented tobacco companies, experienced a staggering almost 70 percent decline in sales and a 60 percent decrease in production volume during the last two months, March and April 2023.

"This downward trend is expected to persist in the coming months due to the rise in illicit cigarettes." During the quarter ended March 31, 2023, the company made a significant financial contribution to the economy by paying Rs5,990 million in excise duty, sales tax, and other government levies.

However, the amount represents a decrease of 16.4 percent compared to the previous period. The decline can primarily be attributed to a decrease in sales volume due to a price increase enforced by excise regulations in February 2023.

Zeeshan said the unforeseen and unparalleled rise in excise taxes presents an opportunity for illegal tobacco manufacturers to expand their operations and gain ground, while compliant tax-paying tobacco companies suffer.

"As a consequence, the government's revenue objectives from the tobacco industry are likely to be limited to below Rs200 billion, while the target was set at Rs260 billion after the FED hike in February."

He emphasised the urgent need for the government to take decisive measures to combat the illegal cigarette market, which currently captures more than 40 percent of the total market share and is projected to escalate to 50 percent, making Pakistan one of the largest illicit cigarette markets in the world.

Furthermore, he said the importance of ensuring the installation of the government's track and trace system in all cigarette manufacturing units. Currently, this system is implemented in only a few tobacco companies.

He urged the government to expedite the installation process once the stay order on the track & trace system is lifted. The effective monitoring of these facilities is crucial to curbing illicit tobacco trade.

Zeeshan also asked the government to reconsider the substantial hike in FED, as it not only hampers fiscal revenue and legal cigarette sales but also fuels the growth of the illegal cigarette market, exacerbating the government's current financial challenges.