Advocacy firm sees $2 billion upside by taxing shadow tobacco market

KARACHI: The country could raise an estimated Rs600 billion in the current fiscal year 2023-24 by integrating the illicit cigarette market into the tax framework, an advocacy firm said on Friday.

"The government could generate equivalent to over $2 billion, from the entire tobacco sector in FY23-24 by bringing the illicit cigarette sector into the tax net," Mustehkam Pakistan, an advocacy firm for curbing illicit trade and tax evasion in the country, said in a statement.

It said the federal government’s tax goal stands at Rs280 billion, however, an additional Rs310 billion is attainable through stringent measures against tax evasion in the tobacco industry.Due to the ongoing economic slowdown in the country and the difficulties faced by industries due to illicit trade, economic activities are being affected, the statement said. "The decrease in purchasing power and inflation, along with the prevalence of tax-evaded cheap products, is forcing people to limit their spending and shift to cheap illegal products."

In this situation, the undocumented cigarette trade is gaining momentum. Cigarettes sold at lower prices, compared to legal cigarettes by evading taxes, are among the items burdening both consumers' health and the national exchequer.Mustehkam Pakistan said the illegal sale of cigarettes has drastically increased in the current financial year due to a FED increase in February '23, while legal companies are experiencing a sharp decline in sales.

"Moreover, in order to address the current economic challenges and meet the revenue deficit, it is necessary to curb the illegal trade of cigarettes so that significant tax evasion from the illegal trade can be collected," it added.

"For this purpose, it is essential to effectively implement the scope of the track and trace system throughout the entire cigarette industry uniformly and effectively to reduce illicit cigarette trade in the country."

The country's ambitious Track and Trace System (TTS), designed to seal revenue leakages in key economic sectors, is failing to meet its objectives, with rampant tax evasion continuing unabated.

More than 18 months since its intended implementation in the tobacco industry, the TTS has not significantly curbed illicit trade. A report said that out of 100 cigarette brands surveyed, only 26 had the mandated tax stamps. Notably, certain local brands were discovered selling both stamped and unstamped cigarettes, highlighting the system's enforcement gaps.

As of now, only two cigarette manufacturers have fully adopted the TTS, contributing approximately 98 percent of the sector's tax revenue. In stark contrast, companies holding over half the market share are paying a mere 2% of taxes, exacerbating the disparity and undermining the system's efficacy.

The TTS was introduced as a structural benchmark by the International Monetary Fund (IMF) to strengthen fiscal responsibility. However, critics argue that the government's implementation has been superficial, focusing more on meeting IMF requirements than on actual enforcement.

The legitimate cigarette market has contracted to less than 40 percent, with illicit trade now accounting for over 60 percent of the sector. This shift represents a staggering loss of over Rs300 billion in potential tax revenue. Despite generating vast amounts of production data, there is little evidence of effective data analysis or utilization within the TTS framework. Without comprehensive enforcement, including at the retail level, the system remains largely ineffective. Daily, over 100 million tax-evaded cigarette sticks flood the market, with law enforcement seizures making only a negligible impact on the widespread illegal trade.