Availability of smuggled cigarettes surges in markets

ISLAMABAD: The anti-smuggling drive against rampant smuggling continues but the smuggled cigarettes have gone up by approximately 176 percent since February 2023 when the Federal Excise Duty (FED) was hiked by more than 150 percent for tax-paying brands in both excise tiers.

Although, cigarettes are not included in the list of Afghan Transit Trade (ATT) their easy, and open availability in the domestic market is rife in all major urban centers, towns, and even rural areas of the country.

The government had hiked the FED last February 2023 on the basis of the assumption that it would reduce smoking incidence but the rampant smuggling and illicit cigarettes foiled all such attempts.

Now it is estimated that the share of smuggled and illicit cigarettes will outpace the share of tax-paying cigarette manufacturers by a substantial margin.

In a background discussion with the FBR and industry officials, they argued that the share of illicit in both forms including smuggled and tax-evaded locally manufactured cigarettes had gone up so it would cross the revenue contribution made by tax-paying multinationals and local companies in the current fiscal year.

Some estimates suggest that with existing excise rates the government revenue potential for 2023/24 stands at Rs551 billion with the existing higher rates of FED in the country but the government is expecting to collect around Rs240 to Rs260 billion. It shows that the government is going to lose around Rs290 to Rs310 billion in potential revenues owing to the increased share of illicit cigarettes in the shape of smuggling and tax-evaded cigarettes.

The industry data shows that the smuggling of cigarettes stood at 4.7 percent of the total market in January 2023 but it went up to 12.98 percent in August 2023, clearly indicating that it has witnessed a substantial increase in the last few months period.

Out of the total volume of 81 billion sticks being used annually, the share of smuggled cigarettes stood at 3.8 billion sticks in January 2023 but now it went up to 10.5 billion sticks, hovering around 12.98 percent.

On the other hand, the duty not paid cigarette share also increased in recent months which was standing at around 50.5 percent in August 2023 against 31.9 percent in January 2023. In totality, the share of smuggled and tax-evaded cigarettes increased from 36.6 percent to around 61.1 percent after raising the FED in February 2023 during the last financial year.

There is no legal import of cigarettes into Pakistan and none of the four Statutory requirements like pictorial health warning, retail price, name of the manufacturer & underage warning mandated by the government of Pakistan exist on smuggled packs.

Open availability of smuggled cigarette packs at retail outlets, without the government-mandated Graphical Health Warning (GHW) which serves as a visible identifier of a smuggled pack, brings into question the enforcement and raises a question mark on the efficacy of the Track & Trace System. If a glaring identifier such as the Graphical Health Warning cannot be enforced, how will the government enforce it through a track and trace stamp, which is much smaller in size?

There seems to be a lot of hype about the government’s anti-smuggling drive but unfortunately, the open availability of smuggled cigarettes across the country raises questions about the seriousness behind this drive.

When contacted FBR high-ups said that the tax collection went up by 65 to 67 percent in the first three months (July-September) period so the volume might not have decreased up to such an extent as being claimed by the industry.