ISLAMABAD-A recent research showed that Pakistan is losing Rs240 billion annually due to tax evasion by illicit cigarettes traders.
IPSOS, the third largest market research company in the world with its presence in 90 markets, recently conducted a market assessment of illicit cigarette brands in Pakistan. A survey of 1000 shops in 10 districts across Pakistan (Karachi, Lahore, Rawalpindi, Multan, Faisalabad, Gujranwala, Hyderabad, Peshawar, Bahawalpur, and Sukkur) was conducted to check and analyse the availability and prices of locally manufactured tax evaded brands and smuggled brands while ascertaining estimated market shares through their visits. This research was conducted in the wake of huge increase in Federal Excise duty in the Finance Supplementary Act approved in February 2023. Government increased 154% in tier1 excise rates while tier ii excise rates increased by 146%.
This drastic excise increase was reportedly aimed to generate additional revenues to meet IMF conditions. Locally manufactured tax evaded cigarette brands and smuggled brands do not ensure compliance with the stipulated requirements of Government of Pakistan which include printing of graphic health warning, underage warning, mentioning retail price and manufacturer’s name.
Furthermore, these brands do not comply with the brand licensing regime of FBR neither do they have the mandated track and trace stamp. These brands also violate the Federal Excise Act and the Sales Tax Act.
As per the findings of IPSOS research, overall market share of legal cigarettes brands is 52% with PTC’s share of 40% and PMI holds 12% share of it. While the whopping 48% remaining market share is with illicit cigarettes brands. Locally manufactured tax evaded brands hold 38% illegal market share while smuggled cigarettes brands hold 10% of the illegal market.
The report assessed the implementation of Track and Trace stamp on different cigarette brands, and it was found more than 83% of the brands collected from the sample were being sold without the government mandated Track and Trace Stamp.
According to the report, over two thirds of the cigarette brands are being sold below the government’s Minimum Legal Price (MLP), exposing the failure of authorities enforce tax laws effectively. Two-third of the cigarette brands were found to be selling below the minimum legal price.
The survey found huge price disparities among locally manufactured tax evaded brands, smuggled brands and legal duty paid brands of cigarettes. Minimum price of duty paid brands was PKR 150. However, locally manufactured tax-evaded brands and smuggled brands sell for as low as PKR 30 and PKR 60 respectively flouting the MLP of PKR 127.4.
In the report, as per market share Jan 23’ figures from retail audit and predictions for June 23’ from different verified sources, the implications of the excise increase showcased that market share of legitimate industry has decreased by more than 10% and the volume has entirely shifted to the illicit sector due to downtrading by consumers due to availability of less expensive illicit brands.
According to the report, the Federal Excise hike has caused a 33% increase in illicit market share and smuggling of cigarettes due to subsequent downtrading by consumers. Illicit market share hence has increased from 36% in 2022 to 48% in 2023.
The report showcased that law enforcement has been unable to effectively control the production, smuggling, and sale of illegal products.
According to multiple resources the report stated that the total tobacco sector in Pakistan sells 83 billion sticks annually. This means that 48% or approximately 2 billion cigarette packs are evading the tax net. This evasion of tax is causing the national exchequer to lose Rs.240 billion annually. The further shift of consumers to illicit brands will lead the authorities to miss their tax collection goals.