Additional Rs60b tax collection from cigarettes expected this year
May 2, 2023 12:11 PM
Pakistan government is expected to collect an additional revenue of at least Rs60 billion after increasing the federal excise duty (FED) on tobacco products, social activists said on Friday, while rejecting the multinational tobacco industry’s claim of illicit cigarettes in the market.
The multinational tobacco companies continue to falsely claim since 2014 that share of illicit cigarettes is 40% of the market. This number is 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. A major part of this illicit activity actually belongs to multinational brands.
Now that the track and trace system has been put in place, the possibility of illicit trade of cigarettes has almost died down, said Malik Imran, country head of 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 said multinational cigarette makers are deliberately spreading the propaganda in the market that the volume of illicit trade is increasing after the rise in taxes on cigarettes, which is a blatant attempt at pressuring 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 implemented fully and no industry is now 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, the health cost of cigarettes is expected to come down to one billion dollars from over three billion dollars annually.
Malik further pointed out that after increasing the taxes on cigarettes, the volume of expenditure on tobacco-related deceases annually would also be reduced from Rs 620 billion to Rs 200 billion.
The multinational tobacco companies have been lobbying that the magnitude of the illicit cigarette trade has prevented the government from increasing tobacco taxes, but the facts are quite the opposite to it.
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, the Pakistan Tobacco Company (subsidiary of British American Tobacco) claims that illicit trade was 40 percent of the total sales volume.
Analysis of financial panel data from the three cigarette manufacturers listed on the Karachi Stock Exchange reveals 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 PKR 23.5 billion in revenue over the last three years.
The study says 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.
The average Pakistani would spend around 10 percent of their total monthly income on cigarettes, he said, adding that higher taxes on tobacco products were the only solution to protect the youth from the menace.
He pointed out that multinational tobacco companies would show their production less to the government to evade taxes, and then sell their underreported stock in the open market, causing a loss of billions of rupees to the national exchequer.