The menace of counterfeit cigarettes

The existence of mafia-like operations of illicit trade in tobacco products (ITTP) in Pakistan exposes the efficacy of the state


The protest in Islamabad by civil society and lawyers joining hands with the residents of Muzaffarabad and other parts of Azad Jammu and Kashmir (AJK) on September 25, 2020 against production/sale of counterfeit cigarettes, having health implications and causing revenue loss of billions of rupees to the Department of Inland Revenue (AJK) and Federal Board of Revenue (FBR), forced both the agencies to formulate a joint strategy against the culprits. The coming days will show how committed they are against the mafias involved in illicit trade in tobacco products (ITTP).

Representatives of civil society warned that if immediate action was not taken, they would take direct action for closure of such units. They said due to apathy of the administration and police, the youth were an easy prey to these mafias.

For many years, the concerned authorities have miserably failed to clamp down on manufacturers of counterfeit cigarettes. Reportedly, FBR’s Directorate General of Intelligence and Investigation Inland Revenue and Inland Revenue Enforcement Network of AJK assured them of joint action against the units involved in the unlawful activities.

Locally manufactured counterfeit/non-duty-paid cigarettes are produced by many companies situated in Khyber Pakhtunkhwa and AJK, causing a huge loss of revenue and serious health issues, especially for the youth. Since these companies conceal their production, excise-related price increase of legal cigarettes widen the gap, resulting in a boom for illicit cigarette trade. The illicit cigarettes sell for Rs30-45 per pack which is less than the Federal Excise Duty (FED) and sales tax payable per pack.

After years of declaring it an objective, Pakistan has yet to implement a track and trace system of tobacco products to fulfill its international obligations. The last attempt by the FBR was declared unlawful by the Islamabad High Court (IHC) with the directions that “the FBR is at liberty to initiate a fresh bidding process strictly in accordance with the law”.

Pakistan is a signatory to the World Health Organisation’s Framework Convention on Tobacco Control [WHO FCTC], which it ratified on November 3, 2004. It also acceded to the FCTC Protocol to Eliminate ITTP on June 29, 2018. Pakistan is one of 181 countries that have signed the FCTC since 2004 and is among 56 parties that have ratified the protocol to eliminate ITTP.

The FBR committed fatal errors in awarding the contract as highlighted by the IHC in its above-referred judgment. Pakistan’s failure to implement a track-and-trace system to curb illegal cigarette sales gives credibility to the allegation that mafias engaged in illicit cigarette trade enjoy the support of corrupt officials and politicians.

A stricter monitoring of green leaf threshing units (GLTs) is the main link in supply chain of 75,000-plus farmers, 500,000-plus retailers and 45-plus manufacturers. Only 11 GLTs are supplying raw material to all cigarette manufacturing units. It is strange that the FBR, which has a workforce of over 22,000, cannot monitor a few GLTs. How can GLTs supply tobacco out of books?

In budget 2020-21, no effort was made to levy health tax on cigarettes when the country was in dire need of funds to meet the Covid-19 challenge.

There is massive tax evasion by the companies engaged in illicit cigarette manufacturing of Rs 10 per kilogramme of tobacco purchased but not reported to Pakistan Tobacco Board (PTB) to avoid the development cess. These companies allegedly do not pay even the Rs 300 per kg tax on packed tobacco after processing by GLTs that is adjustable against cigarette production as well as a Rs 10 per kg levy on processed tobacco at GLT stage. It can be verified from PTB by ascertaining the total production of tobacco in a year that is much higher than the declared purchases. When 100 percent tobacco produced by the farmers is sold in the market, why is the total revenue so low?

There is massive evasion of FED, sales tax, Rs 10 per kg levy on processed tobacco at GLT stage as well as Federal Tobacco Cess and Tobacco Development Cess levied by Khyber Pakhtunkhwa Assembly through Khyber Pakhtunkhwa Finance Act, 1996.

It is pertinent to mention that Pakistan is among one of the largest consumers of tobacco in the world. At the end of 2019, around 26 million Pakistanis of 15 years and above were smokers. The World Health Organisation (WHO) and all other world bodies recommend that at least 70 percent of the price of the cigarette should be levied as tax in order to discourage smoking but the FBR has been lowering the rate and has failed to counter illicit cigarette manufacturing and smuggled products.

In budget 2020-21, no effort was made to levy health tax on cigarettes when the country was in dire need of funds to meet the Covid-19 challenge. For levying this tax, the Cabinet in 2019 tried but withdrew the proposal due to influence of the mafias.

The legislators have failed to take note of the fact that any provincial assembly by a resolution under Article 144 of the Constitution can ask the National Assembly to impose health tax on their behalf. The money would go to the National Health Fund to provide all citizens quality healthcare and to meet challenges like Covid-19 endemic.

Many countries have imposed sin tax on tobacco and alcohol. The United Kingdom in 2018 imposed a Soft Drinks Industry Levy (SDIL) that purports to put a charge of 24p on drinks containing 8g of sugar per 100ml and 18p a litre on those with 5-8g of sugar per 100ml, directly payable by manufacturers to Her Majesty Revenue and Customs (HMRC). The PTI government should avail the opportunity and impose health tax through Finance Supplementary Bill after taking the provinces on board.

The ITTP exposes the efficacy of the state. Pakistan thus fits the description of a “soft state”—famously articulated by the Nobel Laureate, Swedish sociologist, Gunnar Myrdal, who in his 1968 three-volume work, Asian Drama: An Inquiry into the Poverty of Nations, presented a broad-based assessment of the degree to which the state, and its machinery, is equipped to deal with its responsibilities of governance.

The writers, lawyers and authors of many books, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

The menace of counterfeit cigarettes: Mafia-like operations of ITTP in Pakistan exposes efficacy of state