Pakistan: Non-duty Paid Tobacco Brands Flood Market

Source from:  Pakistan Observer  11/18/2013

In the year 2012, 66.5 billion cigarettes consumed in 11 Asian countries were illicit. With 86.3%, the domestic illicit cigarette volumes and consumption of illicit cigarettes were highest in Pakistan whereas the Non-Domestic Illicit was 13.7%.

This scenario resulting in Tax Revenue losses of about more than USD 250 million in 2012 only. These were the outcomes of the study, "Asia-11 Illicit Tobacco Indicator 2012" conducted by Oxford Economics recently.

Apart from the issue of non-duty paid tobacco brands in Pakistan, the situation is quite different in Sri Lankawhere tobacco consumption is hardly one percent in Sri Lanka. Under the law, the cigarrette manufacturing is not allowed in Sri Lanka.

Unlike in Pakistan facing the ugliest form of sectarian hatred, the religious scholars have managed to create a cosmopolitan culture enabling different communities to live together in harmony. However the manufacturing of cigarettes is not allowed in that country.

On the other hand the cigarette manufacturing in Pakistan is a great source of manufacturing. Although the advertisement on tobacco brands is banned in Pakistan yet the cigarette manufacturing has been allowed at a much larger scale in Pakistan which is itself contradictory to the policy of prohibition on advertisement of tobacco brands in media whiled the source of evil has been spared!

The Illicit trade of tobacco brands manifests itself in three major and interrelated ways: smuggled, counterfeit and local tax evaded products. It is a global phenomenon, covering all continents and high and low income countries alike. Cigarettes, being highly taxed, easy to transport, and possessing a lucrative risk to reward ratio, are among the world's most illegally trafficked goods.

The study "Asia-11: Illicit Tobacco Indicator 2012" conducted by Oxford Economics, is the first quantitative benchmark for governments in the region to track and understand the problem. The study covered Australia, Brunei, Hong Kong, Indonesia, Malaysia, Pakistan, Philippines, Singapore, Taiwan, Thailand, Vietnam, and demonstrates that illegal tobacco significantly impacts developed and developing countries alike - occurring in jurisdictions with both high and low tax and price levels, as well as in those with strong reputations for law andorder.

As per the published study; in Pakistan, the consumption of illicit cigarettes is 25.4%. It is important to highlight that these illicit cigarette sales focus on minors who cannot buy products legally and on those on low incomes. Illicit distributors also often supply other illicit products such as alcohol, drugs and firearms. Where there is a good distribution chain and a ready market for illicit products, the rule of law is undermined and corrupt practices thrive.

The domestic illicit consumption makes up 21.9% out of the 25.4% of the total illicit consumption in Pakistan; making the country as a market of consuming about 19 billion domestic duty-non-paid cigarettes, which is the highest amongst the 11 surveyed countries. However currently the Non-Domestic Illicit is only 3.5%;

There is an economics side to illicit trade, as it is demand and supply driven. Consumers want to buy cheap products; criminals want to take advantage of high taxes, which they do not pay to make high profits with low risk of being caught and penalized.

Other major factors include lop-sided fiscal policies, disparities in tax-driven prices, corruption, weak enforcement by the law enforcing authorities, porous borders poor transit controls, growth in illegal distribution networks, and public tolerance and awareness.

As per Euro monitor International 2012, Local Duty Non Paid (DNP) cigarettes are primarily produced by manufacturers located in KPK and Azad Kashmir regions. These can be sold at less than 37.5% of the price of the legitimate cigarettes, simply because of evasion of duties. A blatant example of such an act is the cigarette brand by the name of "Cricket' manufactured by Wattan Tobacco Company of Azad Jammu & Kashmir which is surely and slowly making its inroads in the markets of central Punjab. End

During a market survey it was also revealed that the pack of the brand carried price tag of PKR22.60 + PKR3.40 Sales tax whereas in the market the brand was being retailed at PKR 12 per pack, leaving the question, how the brand was selling even below the minimum excise duty which is PKR 17.6 per pack and should be payable to the national exchequer.

The various researches confirm that illicit trade in tobacco is a serious problem, with implications for government revenues, and for the operation of legal markets. Enditem