Tobacco industry: ‘Illicit sector outgrowing legitimate sector’

ISLAMABAD: The tobacco giant has warned about massive decline of 25.4 billion sticks in volume during the last two years, resulting into shifting and increasing the share of illicit and causing revenue loss to national exchequer of $1 billion (Rs300 billion).

“The formal industry is expected to pay Rs242 billion in shape of taxes while annual loss due to increased share of illicit both in shape of tax evaded locally manufacturers and smuggled cigarettes will cause annual loss to the national exchequer of Rs300 billion for the current fiscal year,” the Pakistan Tobacco Company (PTC) representatives stated while briefing the media here on Thursday.

The overall volume of tobacco industry is estimated at 81 billion sticks out of which the share of illicit was expected to touch 51.4 billion sticks while the share of tax paying tobacco manufacturers is going to shrink to 29.4 billion. “Alone in ongoing fiscal year, the volume is projected to decrease by 11 billion sticks bringing it down from 42.4 billion in last financial year to 29.6 billion in the current fiscal year,” they added.

Since the revision of Federal Excise Duty (FED) tobacco products with an increase of more than 200 percent in last financial year 2022-23, the tobacco sector had swelled to more than 63 percent of the total volume of cigarettes resulting in illicit sector outgrowing the legitimate sector, revealed the data shared by Pakistan Tobacco Company Limited (PTC)’s representatives.

The government led national anti-illicit tobacco strategy and revitalising the dedicated enforcement task force could help reduce illegal trade in tobacco sector and help grow government revenues, PTC representatives stressed.

For the first time in Pakistan’s history, potential government revenue loss due to the illicit sector would be surpassing the total revenue to be collected from the legitimate industry in FY23/24. The loss of potential government tax revenue to the black economy is estimated to be more than $1 billion or more than Rs300 billion, Qasim Tariq, the Senior Business Development Manager for PTC said while sharing the data.

It is expected that volume of more than 11 billion cigarettes would be lost by the legitimate tobacco sector due to downtrading by consumer to tax-evaded and smuggled cigarettes.

PTC representatives showcased month-by-month shipment data since FY21/22. Volumes of the legitimate sector have reduced by more than 55 percent from Jan ’23 till June ’23, raising concerns of business sustainability.

Commenting on recent media reports suggesting boost to government revenue collections from the tobacco industry, Tariq said that the on-ground situation needed to be factored in to develop a comprehensive policy to tackle this menace. Without any enforcement, revenue generation from the legitimate tobacco sector would only be short lived as increase in excise would only lead to putting business sustainability at risk. “Increasing tax rates on cigarettes has no impact on illicit sector which is not a part of the tax system to begin with”, he added.

Referring to the proposals about increased excise rates on imported cigarettes, he said that it is likely that it would have no impact as all foreign cigarette brands were smuggled through illegal channels. Similarly, when there had been minimal to no adoption of the already established track and trace system, rolling out an effective digitised stamp system would also likely meet the same fate. Tariq highlighted that the key to reigning in the menace of illicit trade rested on a healthy mix of appropriate fiscal measures and effective and across the board enforcement.