Market share of illegal cigarette brands rose after hike in FED: IPSOS

ISLAMABAD: A survey conducted by IPSOS — an international research company — has found a massive surge in the consumption of smuggled and locally manufactured tax-free cigarette brands following a massive increase in the Federal Excise Duty (FED) on the legal brands.

The share of illegal brands in the tobacco market has increased from 36 to 48 percent following the hike of 154 percent in the FED for the legal brands, causing a loss of Rs240 billion annually to the national exchequer. IPSOS surveyed 1,000 shops in 10 districts across Pakistan (Karachi, Lahore, Rawalpindi, Multan, Faisalabad, Gujranwala, Hyderabad, Peshawar, Bahawalpur, and Sukkur) to check the availability and prices of locally manufactured tax-free and smuggled brands.

 The drastic increase in the FED was reportedly aimed at generating additional revenues to meet the IMF conditions. The locally manufactured tax-evaded and smuggled brands do not comply with the stipulated requirements including the printing of graphic health warning, underage warning, mentioning retail price and manufacturer’s name.

 Furthermore, these brands do not comply with the brand licensing regime of FBR neither do they have the mandated track and trace stamp. These brands also violate the Federal Excise Act and the Sales Tax Act. As per the IPSOS research, overall the market share of legal cigarettes brands is 52% with the PTC and PMI having shares of 40% and 12% respectively. In contrast, the remaining 48% market share lies with the illicit cigarettes brands.

The locally manufactured tax-evaded brands hold 38% and the smuggled cigarette brands 10% of the illegal market. The report assessed the implementation of Track and Trace stamp on different cigarette brands, and it was found that more than 83% of the brands collected from the sample were being sold without the government mandated Track and Trace Stamp.

According to the report, over two-thirds of the cigarette brands are being sold below the government’s Minimum Legal Price (MLP), exposing the failure of authorities to enforce the tax laws effectively. The survey found huge price disparities among the locally manufactured tax-evaded brands, smuggled brands and legal brands. The minimum price of duty-paid brands is Rs150.

 However, the locally manufactured tax-evaded and smuggled brands sell for as low as Rs30 and Rs60 respectively flouting the MLP of Rs127.4. According to the report, the FED hike has caused 33% increase in the illicit market share and smuggling of cigarettes due to subsequent downtrading by the consumers.

According to the report, the law enforcement agencies have failed to effectively control the production, smuggling, and sale of illegal products. According to the report, the total tobacco sector in Pakistan sells 83 billion sticks annually which means 48% or approximately 2 billion cigarette packs are evading the tax net. This evasion of tax is dealing a loss of Rs240 billion annually to the national exchequer.