Illicit tobacco trade causing annual loss of Rs 7.4 billion: study

Ever increasing illicit tobacco trade has been incurring an annual loss of Rs 7.4 billion ($85 million) to Federal Board of Revenue (FBR), a study revealed. The study "Tracing Illicit Tobacco Trade in South Asia" states that illicit tobacco trade in Pakistan is reportedly 20 percent of the total cigarette market.
FBR record showed that in the year 2007-08, the total cigarette market was 78 billion sticks, of which 63 billion cigarettes were local brands, while the remaining 15 billion were smuggled. Tobacco companies claim that the tax-paying players comprise about 82 percent of the market and contributed nearly Rs 46 billion ($550 million) to the national exchequer during the fiscal year 2008-9.
Two Pakistani tobacco giants' say that there are three forms of illicit tobacco trade in the country - smuggled, counterfeited and duty evaded. However, the tobacco industry tends to underestimate the impact of smuggling. The FBR also seems to share this view of the illicit tobacco dealers. A senior official from the Ministry of Health says that according to information gathered from FBR sources, 18 percent of the illicit sector in Pakistan comprises local duty-not-paid cigarettes and the market share of smuggled duty-not-paid cigarettes is just 2 to 3 percent.
The source for and the veracity of these claims are doubtful, as government officials in Parliamentary Committee meetings have said that the government does not have accurate statistics on smuggling. This absence of smuggling data indirectly helps the PTC and LTC to keep government attention focused on counterfeiting rather than smuggling. Incidentally, the latter involves brands of their respective international collaborators - British American Tobacco (BAT) and Phillip Morris (PMI). Although these companies publicly lament the loss of revenue to the government, neither has released any study that indicates the loss incurred to the business on account of counterfeiting or smuggling. Nor have they launched any mass awareness campaign to warn consumers against illicit products.
The study says that statistics or no statistics, the fact remains that Pakistan is a haven for the illicit tobacco trade. The markets are flooded with contraband cigarettes ranging from substandard counterfeit brands to smuggled world famous exotic brands, costing between less than one to 2 dollars per pack.
The main source of cigarette smuggling into Pakistan is the Afghan Transit Trade facility. Although the Government of Pakistan has banned the import of cigarettes under Afghan transit trade since 1992, evidence points to the lack of effective implementation of the law. The customs department reports that, as per international practice, customs officials do not scrutinise containers destined for Afghanistan to determine the authenticity of declared goods. Officials do not rule out pilfering of goods on their way to Afghanistan from designated ports in Pakistan. Goods reaching Afghanistan often return to Pakistan through the mountainous and porous border between the two countries.
Afghanistan has similar transit agreements with other neighbouring countries. Cigarettes also enter Afghanistan from the Iranian seaport of Bandar Abbas, and via its airports. The ultimate destination of most of these cigarettes is Pakistan. According to the World Bank's Watching Brief Strategy, during 1997 cigarettes worth Rs 2,970 million (around $50 million) were re-exported to Pakistan. These cigarettes were imported by Afghanistan through routes other than Pakistan.
Cigarette smuggling generally is not taken seriously by the law enforcement authorities in Pakistan. Although FBR officials maintain that in the past the FBR was not pro-actively making seizures of smuggled cigarettes, customs, which is a wing of the FBR, has initiated seizures. However, these officials did not provide any data concerning seizures.
The federal government itself is addicted to tobacco revenue. The FBR considers excise duty on cigarettes as one of the top five revenue-generating sources. The Khyber Pakhtunkhwa (KP), where most of the tobacco is grown also sees this activity as a substantial mean of revenue generation. It is currently estimated that the federal government is facing a total loss of RS7.46 billion, of which Rs 5.92 billion is due to tax evasion, Rs 0.24 counterfeiting and Rs 1.30 billion due to smuggling.
The question is whether Pakistan government will be able to rein in the illicit trade of cigarettes. The prospects for this appear bleak as, in addition to the absence of political will, the government regards smuggling as the major source of livelihood for the war-torn economy of at least two provinces KP and Balochistan that borders Afghanistan.