Sources said that after careful deliberations in budget 2017-18, the Federal Board of Revenue (FBR) had adopted a policy stance to introduce the third slab of cigarette taxation as a way to boost revenue collection from documented sector and decrease illicit trade of non-duty paid smuggled/counterfeit cigarettes. This third tier remained as the most effective policy measure in the tobacco industry to check sale of non duty paid cigarettes coupled with effective enforcement.
The third tier (third slab) of Federal Excise Duty (FED) on cigarettes would counter tax evaded cigarettes which are easily available at an average price of Rs 25 (refer to illicit hotspots). This selling price is significantly below the minimum applicable tax.
FBR's data revealed that before the introduction of the third slab, revenue from tobacco industry dropped from Rs 111 billion in 2015/16 to Rs 74 billion in 2016/17, a drop of Rs 37 billion. In the outgoing fiscal year, the payment of Federal Excise Duty (FED) by two major tobacco companies is expected to visibly boost the revenues as volume shifts from illicit to legal industry.
Over the past year, the FBR has intensified its enforcement efforts against smuggled and local tax evaded cigarettes by setting up Tobacco Squads to conduct raids across the country, leading to unprecedented crackdown against these tax-evaded cigarettes. In 2017, an estimated 1.63 billion non-duty paid cigarette sticks and raw material of illicit sector worth billions of rupees have been seized. While the enforcement network can manage to tackle supply side of the problem, other fiscal and regulatory measures like third tier were needed to ensure that the demand for illegal cigarettes is reduced.
Total contribution of legal players to industry is about 45 billion sticks, which shows that the demand for remaining 35 billion sticks is met by unregistered, illicit manufacturers. Over 45 manufacturers are selling more than 145 brands in the market, evading the fiscal and regulatory laws of the country.
It is wrongly assumed that all local manufacturers are tax compliant and there is no illicit cigarette production from them. This contradicts facts abouts raids, multiple seizure reports and confiscation of physical proof of evasion of these illicit brands by the enforcement agencies.
Almost all tax evaded local cigarettes are sold in the sub value segment. These make up for more than 80% of illicit cigarettes sold in Pakistan, who under declare their production to evade taxes and their brands sell below the minimum selling taxes applicable in the country. Some manufacturers are also involved in the producing counterfeit products of renowned brands.
They said that almost all of the illicit cigarettes are local tax evaded cigarettes which comply with all evident pack features required by local regulation. There is no way to confirm whether local tax has been paid or not by merely only looking at empty packs.
All local manufacturers print the minimum price of Rs 48 on their packs. However, tax evaded cigarettes are easily available at an average price of Rs 25 to Rs 30. Wide price gap between the legal and tax evaded cigarettes is the key driver of demand for tax evaded cheap cigarettes widely available across the country
The real issue is enforcement of the minimum price/tax law set by government as illicit brands are sold below the price printed on packs which is merely an illusion created by these local illicit manufacturers. The selling price of illicit brands can be validated by doing a test purchase or asking specifically to the retailer the price of these illicit brands manufactured in KPK and Azad Jammu & Kashmir (AJ&K)
The premium brands make a part of the smuggled brands being sold in Pakistan which is about 15% of the total illicit market. These smuggled cigarette packs do not comply with local health warnings, and are duty-free, without price and GST printed on them selling and being consumed in Pakistan. These premium brands (on average above Rs 130 per pack) are smoked mainly by the elite and are readily available in urban centres. If the market share of these smuggled brands is estimated to be around 10%, then the share of overall illicit trade should be higher than 40% as per figures of State Bank of Pakistan.
The policy decision of Federal Board of Revenue (FBR) to introduce third tax slab for cigarettes and step up its enforcement drive against non-duty paid and smuggled cigarettes has severely hurt the illicit cigarette trade in Pakistan. The government should continue to develop and implement strategies to combat illegal cigarette trade in Pakistan.