Study shines light on cigarette industry in Pakistan

ISLAMABAD: The latest study done by Lahore University of Management Sciences (LUMS) confirms consumption of tobacco has not declined in Pakistan.

The study says tobacco industry has shifted from a legitimate industry to tax-evading cigarette manufacturers in a big way.

The LUMS has estimated it is going to cause an annual loss of Rs300 billion to national exchequer during the ongoing financial year.

Two renowned academic institutions—NUST and LUMS—came up with studies concluding policy of hiking FED by 200 percent proved counterproductive because volume of legit industry started decreasing, while share of illicit witnessed a phenomenal jump in recent years.

A recent study by LUMS, titled “Impact of Taxation on Cigarette Sector in Pakistan”, has uncovered a issue that demands immediate impact of tax policies, particularly Federal Excise Duty (FED) adjustments, on cigarette industry which is causing more loss to government in revenues loss than in revenue collection.

The study, led by Kashif Zaheer Malik, Associate Professor of Economics at LUMS, reveals frequent and substantial increases in FED have had a profound effect on cigarette industry. It states FED was hiked by over 200 percent in last two fiscal years after which the share of duty-paid cigarettes shrank to 42pc, while share of illicit cigarettes went up to 58pc.

The LUMS study highlights need for a balanced and effective tax policy that addresses tax evasion challenges and supports a level playing field for all manufacturers. It underscores importance of comprehensive enforcement, broader tax base expansion and public awareness to mitigate detrimental effects of illicit trade on Pakistan›s economy.

The report provides a detailed assessment of revenue losses caused by alarming trend of shifts from legitimate to illicit cigarette consumption following tax hikes.

The primary research reveals 42pc of sales are DP brands, while 58pc comprise illicit brands, including locally manufactured tax-evaded and smuggled products. This translates to tax evasion of Rs300 billion.

The research states the brunt of increased excise rates over the past two years have fallen solely on the legitimate companies which has caused their volumes to decline. Illicit cigarettes continue to sell in the market due to lower prices and uninterrupted availability due to lax enforcement by the government.

Malik said, “Government has implemented various initiatives to address the extent of illicit sector to bring more companies and illicit sector under tax net. These, however, have not been successful in reducing illicit trade in Pakistan”.

LUMS report says success of Track and Trace System hinges on a genuine, all-encompassing rollout across every industry, coupled with a consistent enforcement campaign. This approach, along with government›s focus on expanding tax base, could reduce prevalence of illicit trade and tax evasion, offering a brighter future for the industry, Malik added.

The report recommended based on profound price sensitivity prevalent in Pakistani market, as well as widespread availability of illicit brands, existing excise tiers must be reconsidered and re-evaluated to reel in potential lost tax revenues. This approach often results in substitution of higher priced legit brands to illicit brands selling at lower prices, it concluded.