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November 20, 2020

Illicit cigarettes, Health Levy may lead to Rs100 bn loss on annual basis

National

November 20, 2020

ISLAMABAD: Total revenue losses to the national kitty will go up to Rs100 billion with share of illicit cigarettes and possibility of imposition of Health Levy on an annual basis, the tobacco sector’s giant companies have estimated. The share of illicit cigarettes in the shape of locally tax evaded, smuggled and counterfeits has been increasing, causing total losses of Rs76 billion to the national kitty.

If the government moves ahead with the imposition of Rs10 per pack as Health Levy, this will cause loss of Rs20 to Rs24 billion to the national kitty because cigarettes of the formal sector will become expensive while prices of brands of illicit cigarettes will remain unchanged, so their share would further go up. In totality, the losses to the national kitty could touch Rs100 billion mark on an annual basis.

In a background briefing shared with a select group of reporters, a representative of the formal tobacco sector’s giant company stated that they did not agree with this assertion that the share of illicit cigarettes stood at 16 to 18 percent equivalent to Rs24 billion as described by the FBR’s Member during a recently held workshop. They were of the view that the experiment of Health Levy remained unsuccessful in many countries like Vietnam, Egypt, Bangladesh and others, they said.

The tobacco sector has come up with invisible identifiers and introduced an App with the name of Digimarc in order to identify the logo of a real pack of cigarettes.

The law enforcement agencies could use this technology to identify illicit cigarette packets. The share of illicit trade of cigarettes, they said, increased after abolishing three tier slabs. The local tax evaded cigarettes; smuggled cigarettes and counterfeit cigarettes have combined market share of 37 percent having a revenue loss of Rs70 billion per year. Out of 37 percent, the market share of local tax evaded cigarettes is nearly 29 percent; smuggled cigarettes 2-3 percent and market share of counterfeit cigarettes now stood at 6-7 percent.

The successive increases in excise duty, including removal of three tier structure, led to a collapse in duty paid cigarette market share. During the last 18 months, excise duty has been increased by more than 93pc, including as a result of reintroduction of two tier structure. Such unprecedented increase in excise duty has reduced the market share of duty paid cigarettes with a corresponding increase in market share of duty not paid cigarettes, which stood at 37.6pc as of March, 2020.

The relative price difference between the cheapest duty paid cigarettes and the DNP (Duty Not Paid) market more than doubled (from 19 to 40 bn PKR). The enforcement measures have, so far, failed to curb the increase in the market share of 'duty not paid' sector. The government intends to introduce track and trace system. However, its success is dependent upon across-the-board implementation enforcement to check at retail level.

The counterfeit cigarette trade has also increased to approximately 2.75 billion sticks per annum, which is in addition to market share of duty not paid cigarettes. Total cigarette consumption has remained stable despite excise rate increases. In Tier-1, the excise rate has increased by more than 30pc, which has shifted some of the volume to smuggled cigarettes not sporting the statutory health warning. Duty not paid cigarettes do not conform to regulations governing legal trade.

The operational sustainability of legit sector is at risk due to successive excise increases. The increase in government revenues due to excise increase is short term as once the consumption shifts to illicit sector, the government revenues are bound to fall as witnessed in 2016-2017. Any additional taxes in any form will only create further problems for the legal sector and reduce the government revenues.

The illicit cigarette manufacturers operate at a price range which is below the 'minimum pack price' applicable in the country if the same product is duty paid [i.e. Rs 62.76 per pack]. This gap needs to be reduced.

Second, the duties and taxes per pack amount to Rs42. Duty not paid cigarettes are being sold below this, thereby, evading taxes and duties in addition to not conforming to the health regulations governing legal trade which requires rationalizing excise rates.

The federal excise duty on unmanufactured tobacco [which was reduced to Rs 10/Kg through Finance Ac. 2019] needs to be increased to at least Rs500/Kg. Further, the rate of adjustable advance income tax on tobacco needs to be increased from currently 5pc to 10 percent.