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Jun 01, 2020 PRINT EDITION

Tobacco sector: Huge revenue loss due to illicit trade in 2019-20

Pakistan has suffered huge revenue loss to the tune of billions during 2019-20 on account of growing illicit trade in tobacco sector, which is now touching almost 40 percent of total cigarettes consumption in the country.

May 08, 2020

Pakistan has suffered huge revenue loss to the tune of billions during 2019-20 on account of growing illicit trade in tobacco sector, which is now touching almost 40 percent of total cigarettes consumption in the country.
Industry experts told Business Recorder here on Thursday that the alarming figure of 40 percent share of illicit trade within the tobacco sector has been conveyed to the budget markers in the Federal Board of Revenue (FBR).
During ongoing budget preparation exercise for 2020-21, industry has given input backed by authentic data that the continuous growth in illicit trade would hamper huge investment in tobacco sector. The figure of illicit trade has now touched 40 percent which is extremely alarming for the documented sector.
The government is focusing on continuous increase in taxes from legitimate industry every year to manage the FBR's tax collection targets that's seems to be a flawed approach when we see that ever increasing price gap between illegal cigarettes and legal cigarettes increases as price of legal cigarettes increases due to the increase in taxes every year, industry experts regretted.
According to industry insiders, legal tobacco industry in Pakistan is paying almost 98% of the total tax collected from tobacco sector with only 60% share in the market and current Prime Minister Imran Khan has acknowledged this on many occasions while discussing Pakistan's economic issues.
With growing illicit market in Pakistan, the legal industry is likely to shut down its business if the Government continues to overburden them with higher taxes while having low control on illegal cigarette trade.
A declining legitimate market share affects the commercial viability of legal cigarette manufacturing operations in the country. Phillip 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.
At that time, the documeted cigarette manufacturer stated that the wide presence of illicit cigarettes in the country has impacted the legal industry volumes. In other countries, illicit trade has been cited as the reason behind closure of legitimate industry's operations, Japan Tobacco International and British American Tobacco recently took the decision to close their factories in Malaysia due to unsustainable competition from the illicit trade in cigarettes.
According to estimates, there are almost 70,000 people directly or indirectly employed in legal tobacco sector in Pakistan and with possible closure of legal tobacco factories due to illicit cigarettes trade, livelihood of thousands of people is at stake.
Cigarettes seller in Rawalpindi, Muhammad Arshad told the correspondent that people from lower middle class are shift to low priced illegal brands due to price hike in legal brands during last few years.
He said that the Government increases taxes to ensure that people are unable to afford them quit smoking, but how can people quit smoking if we have cigarette packets that are selling for Rs. 20 - Rs. 40 per pack.
Industry world-wide loses large amounts to illicit trade in tobacco sector. These losses not only affect the producers of legal cigarettes, but they also involve social costs. The ultimate victims of unfair competition are the consumers.
They receive poor-quality tobacco products and are exposed to health dangers, which may result in higher expenditures on public health. The Governments due to increased illicit trade are also losing out on unpaid taxes by these manufacturers. Hence, the Governments end up not achieving their health nor their fiscal agenda.
There is also an increasing concern that illegal trade is related to other criminal activities, such as trade in narcotics, money laundering and terrorism. Financial Action Task Force (FATF) past report on Illicit trade of tobacco also mentioned a case study of money laundering that involved illicit cigarettes trade in Karachi.
That shows how important for government to control the illicit trade in Pakistan especially when the global issue of FATF grey list continues. "The FATF had strongly urged Pakistan to swiftly complete its full action plan by June 2020," the global body said end-Feb 2020.
Industry experts warned government of huge losses if the issue not handled with better policies and long-term plans to combat the menace of illicit trade in tobacco. In case of continuous growth in illicit trade, there are chances that Pakistan will not only loose huge investment in tobacco sector but there will be a worst impact on job market.

Copyright Business Recorder, 2020