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ISLAMABAD: The illicit trade of cigarettes in Pakistan caused an estimated revenue loss of Rs77.8 billion in 2021, representing a market share of 38 percent.

According to a report developed by Oxford Economics launched here on Tuesday, the sustainability of the legitimate cigarette industry and the significant tax revenues Pakistan Tobacco Company (PTC) supports is threatened by the large illicit market which represented 38% of the cigarettes consumed in Pakistan during the calendar year 2021, with over 200 illicit cigarette brands selling below the minimum mandated price. As a result, an estimated Rs77.8 billion in taxes were evaded during 2021.

The report estimated that PTC’s traditional cigarette business and its value chain made a total contribution to Pakistan’s GDP worth Rs123 billion in 2021.

The rise in the illicit cigarette market share in recent years has coincided with a sharp rise in the excise rates. Excise rates on most legal cigarettes have nearly doubled. With the September 2018 supplementary budget followed by another June 2019 Federal Budget, Tier 2 excise rates—which represent 92 per cent of the total industry volume—were increased from Rs854 per thousand to Rs1,650 per thousand.

The ongoing use of illicit cigarettes is negatively impacting government revenues. Despite the rise in excise rates, the government’s revenue from legitimate cigarette taxation is estimated to have declined to Rs117 billion in 2019–20, six per cent lower than the previous year.

Due to the instability of revenues and growing illicit share, excise rates were not changed in 2020-21. There was therefore no change in the price differential between duty non-paid (illicit) and legitimate brands, as had occurred with recent rises. Government revenues from legitimate cigarette sales rose by 14 per cent to Rs134 billion in 2020-21.

By evading both excise and sales taxes, illicit cigarettes are more affordable than legal, tax-paid alternatives.

Consequently, this consumption would shift to the cheapest legal premium alternative, while the remaining 90 per cent of illicit consumption switches to the cheapest legal alternative. This is a simplifying assumption, however, as consumers of premium illicit products may react in a different manner (for instance downtrading to other legal categories), the report added.

Copyright Business Recorder, 2022

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