Contraband cigarettes estimated to render Rs70bln in revenue losses

LAHORE: Contraband cigarettes are estimated to render Rs70 billion in tax losses to the resources desperate Federal Board of Revenue (FBR) in the current fiscal year of 2019/20, industry officials said on Saturday.

Officials said joint efforts of the FBR and tobacco industry to control unfair sale proved futile as law enforcers are not equipped well to tackle the issue through long-term policies.

The officials said almost 37 percent of cigarettes consumed in the country actually evade taxes, non-duty paid and undeclared. The share of illicit cigarettes increased almost 6 percent in one year due to multiple factors.

A FBR official said the excise duties and sales taxes levied on cigarettes represent an important source of revenue for the government. The federal excise duty and sales taxes levied on cigarettes generated Rs123.9 billion in tax revenues in 2018/19 alone. While the revenues are significant, the government is missing out on a further substantial sum.

“A project of tracing every cigarette produced was launched and process was initiated in order to brining the whole sector in traceability. However, it was challenged by the bidders and the case is now in court of law,” said the official. “If such efforts would not stop then the government revenue could not be increased from cigarettes, sugar and other such sectors.”

The State Bank of Pakistan (SBP) said cigarette production fell 29.3 percent in first half of current fiscal year.

“Re-introduction of two-tier tax structure and continued competition from counterfeits and smuggled alternatives hindered the industry's progress in the first half FY20,” the SBP said in its report. “In such scenario, the federal government may not be able to generate its targeted revenue.”

Industry data showed that the number of cigarettes smoked annually was not declining and stood at around 85 billion sticks, implying the consumption won’t decrease until the illicit tobacco brands are not restricted from being sold in the market.

One key factor is pricing differential between brands of legal industry and illegal cigarette packs available in the market.

Research firm Nielsen estimated 86 percent of the brands produced by the local cigarette manufacturers are sold below the minimum selling price mandated by the government of Pakistan.

“Prices of cigarettes, particularly of tier-2 category consumed by lower and middle income groups marketed by duty paying cigarette industry, rose to the price levels of around 80 per 20 cigarettes whereas cigarettes marketed by non-duty paying illegitimate cigarette industry were available in the market in the price range of Rs25 to Rs30 per 20 cigarette packet,” it said in a report.

“A declining legitimate market share affects the commercial viability of legal cigarette manufacturing operations in the country. Philip Morris International’s recent closure of its factory in Kotri was linked to the widening price gap between legal and illegal products and if this continues to grow then a similar outcome cannot be ruled out for Pakistan’s other legitimate cigarette factories.”

Worldwide, illicit trade has been cited as the reason behind closure of legitimate industry’s operations. Japan Tobacco International and British American Tobacco recently took a decision to close their factories in Malaysia due to unsustainable competition from the illicit trade in cigarettes.

The World Health Organization says weak governance/lack of high-level commitment, ineffective customs and excise administration, corruption and complicity of cigarette manufacturers, presence of informal sectors/distribution channels and population perceptions and social economic status are enabling factors of illicit trade in tobacco. “Globally, ability of administrations to effectively tackle illicit trade in many countries is hampered by lack of commitment by high-level officials and if we see the case of Pakistan then it will be easy to understand that many local tobacco manufactures involved in illegal trade are parliamentarians.”

The World Bank called for implementing of effective policies to counteract the tobacco smuggling and other kinds of illicit tobacco sales.

Industry officials urged the government to take stringent enforcement actions against people involved in illegal trade of cigarettes and introduce better taxation policies to bring illicit cigarette manufacturers into the tax net.