IoK Special Report
The Insight on Kashmir has learnt that there is a growing concern about the ongoing counterfeit cigarette trade in Azad Jammu and Kashmir. The residents report that the local cigarette manufacturing companies in major cities are taking the advantage of weak law enforcement policies and openly violating the tax laws. According to media reports, several local brands are growing as they are sold at a retail price lower than the legal minimum price of a pack of an established cigarette brand. The prices of cigarettes in all parts of the country including Azad Kashmir and Gilgit-Baltistan are fixed by the federal government agencies of Pakistan.
The local cigarette brands print prices on cigarette packs and in newspaper advertisement as per the official rate but sell these cigarettes on different prices in the market. Euro-monitor International, a leading business intelligence company, in 2012 report also revealed that these local brands were evading taxes by selling below the legal minimum price.
The illicit tobacco trade has spread despite of the government’s pledge to tackle this issue. Global market research company Euro Monitor in their 2019 report confirmed that there was an increase in excise tax on cigarettes in 2018, reaffirming the government’s commitment to reducing smoking prevalence. For example, tier 1 priced products saw an increase in the Federal Excise Duty (FED) of 13%, while Tier 2 and Tier 3 saw increases of 4% and 46%, respectively.
During the review period, there were over 45 manufacturers selling approximately 145 cigarettes brands that evaded taxes and regulations, with local illicit brands available for as little as PKR15 per pack.
These low prices saw illicit trade take up an increasingly large share of overall sales of cigarettes, up until the introduction of the new tier 3 rate of Federal Excise Duty (FED) in late 2017.
In 2019 the federal government of Pakistan took the decision to impose a new health tax of PKR10 on each pack of 20 cigarettes in order to help generate funds for the country’s health sector, with this set to be included in the Finance Bill 2019. It was also agreed that the new Finance Bill would allocate funds to help tackle the illegal manufacturing and illicit trade of cigarettes in Pakistan.
Capstan By Pall Mall from Pakistan Tobacco Co remained the leading brand in cigarettes in retail volume terms in 2018. With an economy positioning the brand is primarily targeted at lower-income consumers.
Economy brands retained their lead in cigarettes in 2018, boosted by the introduction of the third tier of Federal Excise Duty (FED). Nevertheless, Pakistan Tobacco and Philip Morris continued to focus on their premium brands such as Benson & Hedges and Marlboro, respectively.
The introduction of a third tier of Federal Excise Duty (FED) gave a boost to Pakistan and Philip Morris with both players seeing gains in 2017 and 2018 at the expense of smaller players and illicit trade. Nevertheless, this is expected to be only a temporary boost, especially given the new government’s decision to remove the third tier of FED, coupled with a further increase in tier 1 and tier 2 FED.
It has been estimated that the cost of tax evasion from illicit cigarettes could be far worse in 2019-20. It is expected that the total revenue losses from such evasion could reach Rs 70+ billion,
According to the latest reports, Illegal cigarettes account for nearly 37% of total consumption in Pakistan. The illicit cigarettes share increased almost 6% in one year and there are multiple factors behind this increase. Data shows that the number of cigarettes smoked annually has not declined and is still the same at around 85 billion sticks which means the consumption won’t decrease until the illicit tobacco brands are not restricted from being sold in market.
A declining legitimate market share affects the commercial viability of legal cigarette manufacturing operations in the country. 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). The re-introduction of two-tier tax structure 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. According to industry experts, Consumers buy illegal cigarettes because, by evading both excise and sales taxes, they are much more affordable than legal, tax-paid alternatives. By evading these levies, the illicit trade is depriving the government of much-needed revenue.
According to World Health Organization, Weak governance/lack of high-level commitment, Ineffective customs and excise administration, Corruption and complicity of cigarette manufacturers, Presence of informal sectors/distribution channels and Population perceptions and social economic status are enabling factors of illicit trade in tobacco. WHO says that globally ability of administrations to effectively tackle illicit trade in many countries is hampered by lack of commitment by high-level officials and if we see the case of Pakistan then it will be easy to understand that many local tobacco manufactures involved in illegal trade are parliamentarians.