Share of illicit cigarettes now 63.5pc: NUST report

ISLAMABAD: The National University of Sciences and Technology (Nust) has found that the share of illicit cigarettes has witnessed a phenomenal increase of 63.5 percent.

In comparison, the tax-paying sector has shrunk to 36.5 percent, causing Rs310 billion loss to the national exchequer.

During the launch of the report titled ‘Illicit Cigarette Trade in Pakistan – Current Situation and Way Forward’, produced by the National University of Science & Technology (Nust), Minister for Defense Khawaja Asif said Pakistan had the capacity to fetch tax collection of Rs27000 billion and the country would not need any IMF program if it collected even half of its potential tax.

Asif further said it was sad to note that counterfeit cigarette manufacturers were members of the assemblies and they guarded their business interests through the assemblies.

He said two major cigarette manufacturers were contributing Rs170b in taxes, while the share of all the other cigarette manufacturers was just Rs2 billion.

He quoted the FBR ex-chairman Shabbar Zaidi as saying that during his tenure that when the FBR planned to implement tax on the cigarette industry, the then National Assembly Speaker Asad Qaiser pressurized Shabbar Zaidi not to implement taxes on the cigarette industry.

The report stated that the current excise duty structure on tobacco products had pushed the consumers to down-trade from legally compliant cigarette brands to illegal tax-evaded brands easily available across Pakistan because of which the national exchequer was expected to face a revenue loss of around PKR310b annually with illicit cigarette brands having more than 60% of the total market.

Following the increasing trend, according to projections for June 2024, the report says the illicit market share will be 63.5%.

The legitimate manufacturers’ market share will reduce to 36.5% in 2023-24. The temporary increase in government revenue from excise hikes is undermined once consumption shifts to the illicit sector as witnessed from 2015- 16 to 2016-17 when government revenues declined by 33%, accompanied by an increase in the market share of duty-not-paid cigarettes due to the widening price gap.

The tobacco sector has the potential to generate PKR551 billion in taxes.

In 2023-24, it is anticipated to create PKR242 billion in total revenue. This translates into an annualized estimated loss of roughly PKR310 billion for the national exchequer, which could be used to reduce the fiscal deficit.

The sales figures for the legitimate industry are expected to decrease from 55 billion sticks in 2021-22 to 29.6 billion in 2023-24, and the illicit market is likely to grow from 30 billion sticks in 2021-22 to 51.4 billion sticks in 2023-246.

This shows that more than 20 billion sticks would move from the legal to the illegal sector, depriving the government of crucial money at this difficult time.

The implications of this trend extend beyond immediate fiscal concerns, raising critical questions about the long-term sustainability of the legal tobacco industry and the potential repercussions for public health.

On Track and Trace System (TTS), the report says there are more than 40 manufacturers of cigarettes across Pakistan, which vary in size.

According to FBR, only two manufacturers have fully implemented the system, while one has partially implemented it.

Six companies are manually applying tax stamps on the packet. Since the system was put into place, counter-intuitively, the prevalence of illicit trade has increased. By using fake stamps, the manufacturers of non-compliant illicit brands are flagrantly breaking the law.

One example is affixing tax stamps on the top of polypropylene cigarette pack covering. The primary goal of the Pakistani Track & Trace System is monitoring of manufacturing volume; however, as in aforementioned cases, certain entities are manually attaching stamps to cigarette packets.

To counter the challenges faced by the legitimate tobacco industry, the report urged the government to come up with a well-thought-out strategy including excise duty structure reforms, modified price threshold, increased enforcement of the law against sales of non-compliant brands, and extensive and consistent implementation of TTS.

“Increased law enforcement, especially in areas like AJK, could help reduce the infiltration of local tax-evaded brands into Pakistan, which is the main component of the illicit cigarette trade with a share of 90%,” the report suggested.