Illegal cigarettes deprive govt of Rs50.9 billion revenue in 2018-19

LAHORE: Oxford Economics in its report has said that cost of tax evasion from illicit cigarettes could be as much as Rs77.3 billion in 2019-20, from Rs50.9 billion in 2018-19 which was nearly 42 percent of the total collected from legitimate sales.

The report, “The economics of illicit cigarettes in Pakistan” said Rs50.9 billion equated to 1.3 percent of all government tax revenues in 2018-19, and 2.1 percent of all indirect tax revenues.

The tax revenues lost to illicit cigarettes are nearly three times the estimated federal government recurrent and development spending on healthcare in 2018-19, the report quoted.

The share of illegal cigarettes increased by more than 6 percent reaching 37.6 percent of total consumption in Pakistan in March 2020, compared to 31.5 percent in the corresponding month last year, with a majority being produced locally.

According to recent data, smaller illicit cigarette market share was due, at least in part, to the lower excise on and prices for the lowest-priced cigarettes. This was helped by re-introduction of the third excise duty band in 2017-18.

However, substantial increases in excise rates have been witnessed in recent years, with the excise levied on the lowest-priced cigarettes increasing by 93 percent in September 2018 and June 2019.

These increases, coupled with the government’s removal of the third excise duty band, appear to have undone progress, again increasing share of illicit cigarettes.

Sharing the findings of the reports with a group of journalists from different cities of Pakistan through video conference on Microsoft Teams meeting, Area Corporate Affairs Head for BAT Middle East and South Asia Madeeh Pasha along with Senior Regulatory Affairs Manager Pakistan Tobacco Company (PTC) Noor Aftab said consumers buy illegal cigarettes because, by evading both excise and sales taxes, illicit cigarettes were more affordable than legal, tax-paid alternatives.

They also shared the findings of a report of PricewaterhouseCoopers (PwC) ‘Review of cigarette taxation in Pakistan’ which said the government needed to avoid levying any additional tax, levy or charge in any form on the cigarette sector, as it would incentivise further evasion and increase in market share of duty not paid cigarettes.

It estimated the volume of counterfeit cigarettes at approximately 2.75 billion sticks, and recommended identifying these units to take action at retail level.

PwC report said the government’s three tier taxation structure on tobacco helped increase revenue by 29 percent. The government registered 34 percent increase in revenue in both tier two and three, as consumers shifted to legitimate sector once the prices of duty paid cigarettes became competitive. However, tier three has now been removed.

Madeeh Pasha said, “The unprecedented increase in excise re-instated the price gap between legit and illicit cigarettes ie Rs40, which in addition to an increase in duty not paid cigarette volume has also put the sustainability of government revenues at risk.”

The pattern of excise increases was similar to years 2013-2017, during which the successive excise increases widened the gap between legit illicit cigarettes to Rs44 which led to a massive decline in government revenues, she added.

The report said Illicit cigarette manufacturers operated at a price range below the ‘minimum pack price’ of Rs62.76/pack. This gap needs to be reduced.

The BAT representative said duties and taxes per pack amount to Rs42.

PwC said the minimum prescribed price for similar and comparative products produced by legit manufacturers should be competitive. The advance adjustable federal excise duty on unmanufactured tobacco, which was reduced to Rs10/kg from Rs300/kg through Finance Act, 2019 needed to be increased to at least Rs500/kg. Further, rate of adjustable advance income tax, currently five percent should to be increased to 10 percent.

At the moment, there is limited transparency of the movement of raw materials and finished products throughout the supply chain as evident from increase in duty not paid market share. The monitoring of GLT units, as envisaged under the law should be made more effective to identify points of likely fiscal leakages.

This, the PwC said could be accomplished more effectively by adopting the mechanism introduced for sugar industry, wherein personnel of chartered accountant firms were deputed alongside officers of tax authorities.

The dispatch slips from GLT units to cigarette manufacturing companies could easily be reconciled with the sales volume reported by cigarette companies to identify any underreporting of sales.

The government needs to ensure across the board implementation of track and trace system with enforcement to check at retail level. There was need to overcome poor coordination among government departments through clear communication and reporting lines.

The threat posed by smuggling might be mitigated by harmonising the relevant laws to mandate the printing of a health warning similar to local brands on all imported cigarette packs.

Such an efficient and effective enforcement was bound to reduce the non-duty paid cigarette market share and help government achieve its settled objectives, the PwC recommended.