ISLAMABAD: Pakistan Tobacco Company has stopped 80 percent of its total production which may lead to the total shutdown of its factories due to enhanced Federal Excise Duty (FED) and an exponential increase in illicit cigarettes after mini-budget.
The company has also decided to re-export four of its machines due to 50 percent decline in volumes in March 2023 as compared to March 2022 and an increase in the share of illicit tobacco from 36 percent in January 2023 to 42.5 percent in April 2023. The smuggling volume of cigarettes has also been increased to 67 percent since January 2023.
These announcements were made by the senior PTC officials during a visit of media to its Jehlum factory arranged by the PTC on Saturday.
During the factory visit, it has been witnessed that out of 10 machines, eight production lines have been shutdown and ultimately factory may be closed.
The PTC officials said that the company which was a symbol of the corporate world is now thinking to lay off its employees after closure of most of its manufacturing machines. With two machines operative, the situation is getting worse day by day and will ultimately result in closure of the factory.
Astonishingly, there are no enforcement efforts visible to control illicit trade/smuggled cigarettes after 200 percent raise in the FED and the functioning of the track and trace system. “FBR is well aware of the alarming situation due to online transfer of track and track data directly from the factory, but nothing has been done,” PTC officials regretted.
Representatives of the Pakistan Tobacco Company shared that a steep decline in the volume of the legitimate industry and a sharp increase in the sales of illicit cigarettes are being witnessed.
The exorbitant excise increase in February 2023 coupled with the lack of enforcement has amplified the sale of illicit cigarettes including Duty Not Paid (DNP) and smuggled cigarettes.
As per recent data by the Pakistan Bureau of Statistics, volumes produced by the legitimate Tobacco Industry had declined by 50 percent in March, which is the first month of sales after the exponential excise increase in February, whereas, the total Large-Scale Manufacturing (LSM) decline was half of the tobacco industry at 25 percent. This impact has also been witnessed throughout the year, whereas, during the period June 2022 to March 2023, the legitimate tobacco industry suffered a huge loss in production of 24 percent, three times the size of what the LSM sector witnessed, they informed.
This impact has led to the down-trading of consumers from legitimate cigarette brands to tax evaded cheaper options, which are locally manufactured DNP cigarettes and undocumented, smuggled cigarettes. Since January 2023, the volumes of non-duty paid cigarettes and smuggled cigarettes have shot up by 32.5 percent and 67 percent respectively. This has led to the illicit sector growing to upwards 42.5 percent of the total market.
In 2022-23, share of legitimate tobacco sector was 41.4 billion sticks while the illicit sector’s share was 41.6bn sticks. However, after recent irrational hike in FED on tobacco industry, it is projected that share of legitimate tobacco sector in 2023-24 will be 29.6bn sticks while the illicit cigarettes share will reach 53.4bn sticks in 2023-24. This means that 11.8 billion sticks will shift to illicit cigarettes.
Dispelling the impression created by so-called NGOs that the illicit cigarette industry share is only 9-18 percent, PTC officials said that the figures of such non-existent NGOs have no relevance. All these figures are neither authentic nor backed by any actual market research.
Qasim Tariq, Senior Business Development Manager, shared that because of a more than 200 percent increase in excise in February 2023, it will be the first time in the history of the country that the tax loss caused by the illicit sector in the fiscal year will be more than the legitimate industry’s contribution to the national exchequer. If the current fiscal regime prevails, damage to the national exchequer, as well as the legitimate industry will be immense and hard decisions will have to be taken.
A key initiative to curb illicit trade was the implementation of Track and Trace in the tobacco industry however, despite multiple directives by the Prime Minister for across-the-board implementation of track and trace nationwide, it remains a distant dream. Local manufacturers continue to flout the rules and regulations of the country with impunity. This is further fuelled by advertising and promotion campaigns by illicit manufacturers by offering cash prizes, giveaways and merchandise to consumers, which is prohibited. An aggressive and effective enforcement campaign must be undertaken to curb this menace.
Tariq shared that the company has informed the FBR that it is exploring the option of re-exporting four of its machines in its manufacturing units owing to the loss of sales volume by the legitimate industry.
Fiscal interventions and enforcement must go hand-in-hand to control the growing menace of the illicit sector. As per the latest industry standards, if all conditions remain the same, the illicit sector will approximately double in comparison to the legitimate sector by next year. This will not only have irreconcilable losses for the legitimate industry but also for the country due to job losses and reduced investment at a time when the country is already facing intense financial constraints.
Copyright Business Recorder, 2023