Rs62.9 bn revenue loss from illicit cigarette sale

ISLAMABAD: The government has lost approximately Rs62.9 billion revenue from the illicit consumption of cigarettes in fiscal year 2016-17 alone, Asia Illicit Tobacco Indicator 2016 – Pakistan, says a report prepared by Oxford Economics.

This represents an increase of 21.2 percent in comparison with 2015-16. In Pakistan last year a new tier (tier-3) of Federal Excise Duty (FED) was introduced with the possible attempt to curb the illicit trade of cigarettes. Before introducing tier-3, certain number of brands were falling under old tier-2 and FED thereon may be levied and collected @ PKR33.4/pack. Now, these brands are shifted towards tier-3 and FED thereon is levied and collected @ PKR16/pack. After introducing tier-3, old tier-2 has almost been wiped out and only one brand falls within tier-2. Further, significant number of old tier-2 brands automatically fell in new tier-3 and remaining brands either have been replaced with reduced priced brands so that it can be covered under tier-3 or have negligible market. Effectively, tier-2 has significantly been vanished therefore rationale of introducing tier-3 and tier based FED structure as a whole is being debated.

After the introduction of the third tier of excise duty the revenue from cigarette industry is expected to touch Rs90 billion which had fallen to Rs74 billion. The EY Ford Rhodes Research done recently advocates for percentage to price FED in Pakistan instead of a fix levy. For instance, under the present laws, a brand with sale price of Rs90 is levied an FED of Rs33.40 while a brand with price of Rs91 is charged an FED of Rs74.80 which is illogical.

According to various researches, between 2010-11 and 2015-16, illicit cigarette consumption increased by 69 percent. Pakistan National Heart Association (PNHA)’s research shows that 89.84 percent cigarettes being sold in the markets of Pakistan are manufactured within Pakistan.

In Karachi, a random sampling of cigarettes being sold showed that around 25 percent of them were illicit while 46 percent had no price written on the pack. In Quetta, PNHA found that 40 percent cigarettes being sold by retailers were illicit. While in other cities, this figure did not cross 10 percent.

The research shows that over 60 percent cigarettes being sold in Pakistan are priced between Rs30 to Rs60 while around 8.96 percent do not contain any price on the packs. PNHA assessed from the market sampling that the illicit cigarettes being sold in Pakistan do not exceed 10 percent of the total cigarettes being sold openly.

From where does the rest 25 percent production of illicit cigarettes comes from is a question yet to be answered. Sustainable Development Policy Institute’s researchers have questioned that this mismatch in data leads to question (not assert) what if the legitimate companies under report their production figures to evade the FED and themselves selling some part of their production illicitly. Why would legitimate sector under report? To convince the government about high illicit trade and then advocate for introduction of a subtle price reduction mechanism in the form of a tricky low FED regime designed to curb illicit trade and support government kitty. According to SDPI’s research, data of volume of illicit trade has two major sources i.e. tobacco industry and independent third party source. Historically, the data has been reported by the tobacco industry itself by using the retail’s audit data.

They report that during the six-year period 2008- 13 the illicit trade had witnessed a growth of 43.5 percent. And in June 2017, peak level 41.2 percent cigarettes were being sold illegitimately. With the increase in illicit trade, the estimated government’s revenue loss from illicit trade had reached Rs62 billion in 2016 from Rs27 billion in 2012.

Annual cigarette consumption in Pakistan is around 86.7 billion sticks (49 billion in 1997). Annual local production averages above 57 billion sticks, rest of the demand is predominantly met by illicit market of cigarettes which is a grave concern for legitimate cigarette industry. State Bank of Pakistan has identified that tax evasion in cigarette sector generally takes place in one of the following three forms:

“a- On import for the commercial use (also known as International Transient Brands) on which applicable taxes include duties, excise and sales tax. These products may have had no taxes paid on them at all, or may have had lower taxes paid.

b- The undeclared local production or Duty-Non-Paid (DNP) whereby products are produced and consumed but without the payment of local taxes. These products may be manufactured in approved factories but not declared to the authorities, or these may be manufactured in an informal setup.

The third is counterfeit products which are also an infringement of Intellectual Property Rights (IPR). These products are identical or near identical copies of a genuine branded product. By definition such products are illegal, as the manufacturer is not authorised by the brand owner to use the counterfeited brand assets. Counterfeits may be produced for the local market or exported.”

The researches have given a way forward to control illicit trade: “ Licensing: Official authorisation for engaging in any activity within the tobacco supply chain. Product markings: Affixed images on product packaging that indicate date and location of manufacturer and the intended retail market.

Enforcement: Commitment to detect and prosecute illicit trade activity. Public awareness: Disseminating information about the risks associated with illicit tobacco trade to motivate support for enforcement activities. Countries like Canada, Spain, Italy and United Kingdom have adopted the above measures in order to control illicit trade.”

National Health Services, Regulations and Coordination Secretary Naveed Kamran Baloch while talking to The News said that the health ministry has talked to the FBR and is ready to talk again regarding the figures and revenues being collected as a result of FED. He said that the curtailment of illicit cigarettes is totally an implementation issue and has nothing to do with taxation. He maintained that it is difficult to take any stance against powerful industries yet the Health Ministry and its minister and he himself is of the view that the figures available with them depict a different story as being told by other.