Tackling illicit tobacco trade

Smoking cigarettes is injurious for public health, but smoking illicit cigarettes is injurious for registered tobacco firms and the government, too. As the budget nears, there are news reports indicating "tough steps" against illicit tobacco trade in the offing.
Reportedly, there has been behind-the-scenes industry lobbying, with "facts" garnered through an international report that was released last year
Illicit tobacco trade - which includes cigarettes that are counterfeit, contraband, foreign unspecified variants, and duty-free - can hurt government revenues, as per the said report, titled "Asia-14, Illicit Tobacco Indicator 2013." The report was prepared by the International Tax and Investment Center and Oxford Economics in September 2014, and was commissioned by Philip Morris International, a major tobacco multinational.
The report covered 14 Asian economies: including Pakistan, Australia, Hong Kong, Indonesia, Malaysia, Singapore, Cambodia, Laos, Thailand, Vietnam, Myanmar, Taiwan, the Philippines, and Brunei. Back in 2013, nearly 11 percent of total cigarettes consumed - or 83 billion sticks - in these countries were illicit. As a result, these 14 governments lost tax revenues worth an estimated $3.9 billion that year. China, Japan, and India weren included in the report due to lack of credible data from those markets.

It must be noted that while Pakistans share in total cigarettes consumed in this 14-market sample was 11.1 percent, its share in the illicit tobacco consumed in this market was 22.7 percent. That makes the country third-largest contributor, behind Vietnam (26.5%) and the Philippines (23%). However, Pakistans share in illicit tobacco consumption has declined from 25.8 percent in 2012 due to an 18 percent fall in its domestic-illicit cigarette sales.
Pakistans legal domestic sales, about 63.7 billion sticks in 2013 (0.5% YoY fall), were all accounted for by PMI and British American Tobacco. Due to the falling illicit tobacco trade between 2012 and 2013, Pakistan lost less tax in FY14 compared to FY13. Actual taxes from excise duties were $684 million (Rs70.7 bn) in FY14 and $632 million (Rs61.6 bn) in FY13.
For context, illicit tobacco consumption in Pakistan is still lower than Hong Kong, Malaysia and Brunei, where 33.6 percent, 35.6 percent and 97.6 percent of all cigarettes consumed, respectively, are: illicit.
The report provides valuable data in terms of break-up of illicit trade Domestic illicit trade was 18.6 percent of all cigarettes sold, followed by unspecified market variants (3.7%), contraband (0.4%), and counterfeit (0.1%). Excise duties have nearly tripled between 2008 and 2014. From Rs323 per thousand cigarettes sold in 2008, excise duty jumped to Rs880 per thousand cigarettes sold in 2014. As a result, there has been an upward trend in cigarette price and a downward trend in legal-domestic sales.
But, while the report quantifies the alarming sales quantum and tax losses on account of illicit trade, it doesn elaborate on why the trend for Pakistan is that of improvement. It does not discuss what has worked at policy level, or whether this improvement is an aberration.
Enhanced enforcement measures by the FBR are welcome, for unregulated cigarette sales deprive the exchequer of revenues and don follow packaging and health guidelines. But the authorities must do their own assessment studies as to how much role higher excise duties have in promoting illicit tobacco trade. If the problem is enforcement, one cannot blame the policy. Enforcement must be beefed up.