Legal businesses in peril: 'Higher taxation to boost illicit tobacco trade'

The wide presence of illicit cigarette in the domestic market is causing Rs 44 billion annual loss to the exchequer in shape of revenue.

Industry sources told Business Recorder on Tuesday that the documented and legal tobacco industry in Pakistan is continued to face a critical challenge with the presence of non-tax paid cigarettes and higher taxation on legal tobacco industry.

According to the laws, a pack of cigarettes being sold in Pakistan should bear the Graphical Health Warning (GHW) and should not be sold below the prices set by the Ministry of Health. In addition cigarette advertisement is not allowed in any manner.

Despite of these laws, the government is unable to implement and enforce these laws on ground, as the illegal cigarette manufacturers are operating freely and selling undocumented cigarettes on discounted prices in the different parts of the country. They are also continuing to advertise their products locally.

Surprisingly, the major chunk of these illegal cigarettes is not being smuggled into the country, but is from the home grown illegal trade. Locally manufactured cigarettes, despite adhering to printing regulations such as health warnings and minimum price on packs, are being sold at below the set prices.

As per estimates, the illicit and illegal cigarette trade is causing a loss of Rs 44 billion annually to the national exchequer in tune of tax revenue. The State Bank of Pakistan (SBP), in its report, has also mentioned that cigarette production fell by 29.3 percent in first half of this fiscal year (FY20) compared to last year (FY19).

According to SBP the re-introduction of two-tier excise duty structure, uncertainty regarding the implementation and mechanism of track and trace system, and continued competition from counterfeits and smuggled alternatives hindered the industry's progress in first half FY20. In such scenario, the federal government may not be able to generate its targeted revenue, the SBP warned.

Industry sources said that if the Health Ministry focuses on implementing its own laws they might be able to generate a lot more revenue. With the help of Federal Board of Revenue (FBR), the revenue collection from the cigarette industry can be increase by restricting illegal trade in the country.

Talking about the suggested Rs10 health tax on tobacco products and Rs1 on carbonated drinks, industry sources said that this any further tax on legal tobacco industry can increase illicit trade, which has already a market share of some 40 percent in the domestic market.

Increasing taxes on the manufacturers that are already paying high taxes and facing issues due to the illegal trade in the country will only increase the prices of their products while the illegal manufacturers will continue to sell at the same cheap price. This effectively means the smoker will not quit, but will shift to the illegally trade cigarettes that are available for as low as Rs25 per pack, they informed.

In the budget speech 2019-20, the then Revenue Minister clarified that additional health tax cannot be imposed on cigarettes and beverage industry and any additional funds required by the Health Ministry will be allocated to them as per the federal pool, which clarifies that there is no need to impose more taxes in the name of Health.

Data also shows that the number of cigarettes smoked annually has not declined and is still the same at 85 billion sticks which means the consumption won't drop until the illegal cigarettes are not restricted from being sold in market. This is possible only by implementing the existing laws and stopping the illegal trade.

Industry sources said that currently, Pakistan is fighting against Coronavirus (COVID-19) and many corporate giants and others are helping the Prime Minister (PM) to generate funds to fight the pandemic.

The country will require lots of funds to take the required measures in current scenario but if the government actions will hit the illegal trade within the country, it is expected that a large fund cannot be generated for fight against COVID-19.