ISLAMABAD: The government has estimated to generate an additional revenue of at least Rs60 billion following raise in the Federal Excise Duty (FED) on tobacco products, according to the Federal Board of Revenue (FBR) projections for the remaining period of 2022-23.

Referring to the FBR’s statistics, social activists and tax experts Monday rejected the data of the multinational tobacco industry about the sudden increase in illicit cigarettes in the market after mini-budget in Feb 2023.

They said that the said tobacco companies continue to falsely claim since 2014 that share of illicit cigarettes is 40 percent of the total market. This number seemed to be used consistently to cause panic in the government. According to independent studies the actual share of illicit cigarettes in the market is around 18 percent.

Rise in FED gives informal cigarette industry a huge boost

Now that track and trace system has been put in place, the possibility of illicit trade of cigarettes has almost vanished, said Malik Imran, country head Campaign for Tobacco Free Kids.

He said that they have conducted a survey to explore the volume of illicit cigarettes in the market. He says that though the findings of the survey will be made public next week, “tentatively we can say the volume is now negligible”.

He accused the multinational cigarette makers for deliberately spreading the propaganda in the market that volume of illicit trade is increasing after the rise in taxes on cigarettes, which seemed to be an attempt to pressurize the government. There has been an increase in revenues of international cigarette brands this year according to their own reports.

“Track and trace system has been fully implemented and consequently no unit would be able to do illegal business,” he categorically stated.

He said it is estimated that cigarette consumption has plummeted after the recent taxes on tobacco. He said due to the decline in consumption, health cost of cigarettes is expected to come down to US$1 billion from over US$3 billion annually.

Malik further pointed out that after increasing the taxes on cigarettes, the volume of expenditure on tobacco related diseases annually would also be reduced from Rs 620 billion to Rs 200 billion.

The tobacco companies have been pleading that magnitude of illicit cigarettes trade has prevented the government from increasing tobacco taxes, which is contrary to the factual position.

A research study estimates of the illicit trade market, as a percentage of the total cigarette market in Pakistan, range from 9 percent to 18 percent. In contrast, one of the leading companies claims that illicit trade was 40 percent of the total sales volume.

Analysis of financial panel data (tobacconomics) from the three cigarette manufacturers listed on the Karachi Stock Exchange revealed that approximately 4 billion cigarette sticks were underreported in 2020-21. The year-by-year estimates show that cigarettes were under-reported by 7.8 percent, 7.9 percent, and 8.6 percent in 2018-19, 2019-20, and 2020-21, respectively. Collectively, the government is estimated to have lost more than Rs 23.5 billion in revenue over the last three years.

The study revealed that rigorous evidence from across the world demonstrates that increasing the price of tobacco products through higher taxation is the most effective way to reduce tobacco consumption. The cigarette industry in Pakistan argues that higher taxes drive illicit trade, claiming smokers seek out smuggled or non-duty-paid cigarettes because they cost less, though this is against the fact as per the research studies carried out in different areas of the country.

The study reveals that undeclared production is the key cause of illicit trade in Pakistan and better tax administration, particularly to prevent tobacco industry under-reporting, will maximize the revenue potential of the federal excise duty.

Sanaullah Ghumman, secretary general of Panah, said the increase in the FED on cigarettes was in line with the recommendations of the World Health Organisation (WHO); therefore, the public should support the government’s move to discourage tobacco consumption.

He said the government should stand by its decision of increase in the FED as this would help collect additional revenue of Rs60 billion from taxes on cigarettes.

Copyright Business Recorder, 2023