Taxing tobacco

While there is little doubt that tax evasion is rampant across Pakistan, questions have been asked over whether tax evasion in one particular industry is being aided in some way. Cigarettes from certain brands continue to be sold in major cities, in open disregard for the country’s tax laws. As per Pakistan’s tax laws, no pack of 20 cigarettes can be sold under Rs63. However, an investigative report by this media group confirms that cigarettes continue to be illegally sold for less than that per pack – Rs30-40. This is open violation of the fact that cigarette companies have been bound to sell their brands at new prices. The fact that only certain brands have been able to get away with under-pricing confirms that they are the ones that are avoiding paying taxes – which is not only causing a loss to the public exchequer at a crucial time, but giving them a competitive advantage against cigarette brands that are paying the requisite taxes as per the new tax laws.

What is even stranger is that these brands continue to be sold under price despite their new packaging showing the current year’s pricing. Under the new duty regime, almost 90 percent of the price of cigarette is to be paid as duty. One must also wonder whether the massive decline of cigarette sales shown by tobacco companies – of around 450 million sticks a month – is a result of them pushing cigarettes illegally into the market. This decline is reported to have been causing a loss of Rs1 billion to the exchequer per month. Combined with the increase in sale of smuggled cigarettes, the government is now losing around Rs1.5 billion per month.

The government and the FBR need to get to the bottom of the matter. If cigarette sales have indeed fallen, then the increase in taxation fails on the revenue angle but is a boon for public health. But as our investigation shows, tobacco companies could be getting away with moving a big chunk of their sales out of their formal records. Questions have been raised over how close certain cigarette company owners are to the ruling party. The list includes sitting politicians in both the government and opposition. It is well known that over 30 percent of Pakistan’s 70 million tonne tobacco produce does not show up on the papers. There is little doubt that the produce finds buyers, which raises the concern of whether formal sector tobacco producers are simply not showing a part of their inventory. The government will need to put the tobacco sector in check if it wants its tax collection efforts to remain credible.