Pakistan: Illicit Cigarette Trade Deprives Exchequer of Annual RS. 24 Bln Revenues

Source from:  Business Recorder 05/05/2016

The illicit trade of cigarettes, considered one of most serious challenges to national economy, deprives national exchequer of Rs. 24 billion revenues per annum.

Around 19.5 billion illicit cigarettes were consumed in 2014, out of which 17.3 billion or 89 percent were local non-duty paid.

In a Nielsen report entitled "The Challenge of illicit Trade in Cigarettes," it was revealed that in addition to billions of rupees revenue loss to government, local non-duty paid cigarettes undermine country's public health objectives by giving easy access to youth and encouraging them smoking by selling cigarette packs below the minimum tax payable on a pack.

Nielsen's Representative Jawad Riaz and Chief Executive Officer (CEO) of CRS Communications, Aniq Zafar presented the report at a Media Interactive Workshop held here on Wednesday and answered vollies of questions raised.

Jawad Riaz said in 2013, Pakistan ranked 4th highest in Asia on basis of share of illicit cigarette segment in total cigarette market in the country and added in Pakistan, around 1 out of every 4 cigarettes sold is illicit which is 137 basis points higher than global average.

Similarly, in 2014, more than 19.5 billion illicit cigarettes were sold in Pakistan. On average, more than 1.6 billion illicit cigarettes are sold in Pakistan every month, and this illicit segment continues to grow. During the last six years, the illicit segment has grown by 43.5 % and the tax-paid cigarette volume has declined by 11 %.

He said on average more than 1 billion illicit cigarettes are annually added to the illicit segment in Pakistan and added this high prevalence is driven by a multitude of demand and supply factors.

Jawad said as fiscal and regulatory burden on tax-paid segment increases, more and more consumers are purchasing illicit substitutes that are either cheaper (due to tax-evasion) or are non-compliant (due to lack of health warnings).

The other important thing revealed in the report was macro-economic factors including rates of employment, income and inflation which also impact affordability of cigarettes and hence level of illicit trade.

The pricing and regulatory differential with neighbouring Afghanistan also plays a key role in continued inflow of smuggled cigarettes into Pakistan (in 2014, allegedly more than 2 billion cigarettes were smuggled into Pakistan).

High profit margin that retailers make by selling illicit products also drives the growth of such tax-evaded products. Above all, lax enforcement of fiscal and regulatory laws is the key factor that influences the incidence of illicit trade in the country.

Answering a question, Aniq Zafar said Local Tax Evaded (LTE) cigarettes are extremely cheap as an average selling price of LTE brands in Pakistan is Rs. 27 per packet, which is far below the minimum tax per packet of Rs. 33.80.

Selling a packet of cigarettes below the minimum applicable tax is itself clear evidence of tax evasion. On the other hand, most of the tax-paid brands are priced at Rs 57.

In the last four years alone, this price differential between tax-paid and tax-evaded brands has increased by a 100 %. This growing price gap between the two segments is fuelling the growth of LTE cigarettes in Pakistan, making it 89 % of the total illicit segment.

With regard to regulations, Jawad Riaz said over the years, the government has put in place a robust regulatory regime intended to curtail illicit trade in cigarettes and added over 25 rules and laws prescribe strict action, regulating virtually every step of the cigarette industry supply chain.

Despite this comprehensive regulatory framework, illicit segment occupies almost a quarter share of the overall cigarette market in Pakistan. This clearly shows that lax enforcement of fiscal and regulatory laws is the real hurdle in curtailing this.

He emphasized the need to execute a comprehensive and holistic strategy to tackle illicit trade in cigarettes. Multiple laws already exist and if enforced rigorously can bring down the incidence of the illicit segment and help the government in raising more revenue.

Aniq Zafar said it is vital for all stakeholders to take a consolidated and unanimous approach to play an effective role against this ever growing menace. Enditem