Tobacco sector suffers as tax measure fuels black market: industry data

ISLAMABAD: A tax measure meant to curb the illicit cigarette trade has backfired, hurting the legitimate industry and benefiting the tax evaders, according to industry data and experts.

The Track and Trace System, a digital mechanism to monitor the production and distribution of tobacco products, was introduced in January 2023 as part of an agreement with the International Monetary Fund (IMF) to increase tax revenue and reduce the black market.

However, the system has failed to achieve its objectives, as the formal sector, which complied with the new rules, saw its production volume drop by 50 percent in 2023, while the informal sector, which resisted or bypassed the system, continued to flourish.

The data show that the monthly production of legal cigarettes declined from 4.9 billion sticks in January 2023 to 2.4 billion sticks in December 2023, while the market share of illicit cigarettes increased from 33 percent to 44 percent in the same period.

The main reason for the decline of the formal sector was the sharp increase in the Federal Excise Duty (FED), a tax levied on tobacco products, which was raised by 200 percent in the last fiscal year.

The hike made legal cigarettes more expensive and less competitive, driving consumers to cheaper and untaxed alternatives.

The Track and Trace System, which required the manufacturers to affix digital stamps on each pack of cigarettes, also added to the cost and complexity of the formal sector, while the informal sector found ways to avoid or delay the implementation of the system.

Some of the illicit manufacturers obtained stay orders from the courts, claiming that the system was unfair and discriminatory. Others simply ignored the system and continued to produce and sell cigarettes without any stamps or tax payments.

The authorities, meanwhile, failed to enforce the system effectively, as the illicit cigarettes were widely available and sold in every corner of the country,

without any fear of penalties or prosecution.

The IMF, which had pushed for the Track and Trace System as a condition for its $3 billion loan program to Pakistan, has expressed concern over the poor performance of the system and urged the government to take corrective measures.

However, the government has shown little interest or willingness to address the issue, as it faces pressure from powerful political and business interests that benefit from the illicit cigarette trade.

The situation has left the legitimate industry in a state of despair and frustration, as it sees its market share and revenue shrink, while the illicit industry thrives and undermines the public health and fiscal objectives of the country.