Tobacco industry witnesses sharp increase in smuggling of cigarettes due to tax hike

ISLAMABAD-Following the excise increase on cigarettes in February by the government, March marked the first complete month of sales under the new regime and the results are dismal.

The industry has witnessed a sharp increase in the incidence of illicit cigarettes generally and smuggled cigarettes specifically. During a media briefing session by representatives of Pakistan Tobacco Company Limited (PTC), they shared results of recent excise increases for the cigarettes industry.

Before the mini-budget in February, the excise on a pack of Tier 1 cigarettes was 130 rupees, whereas it was increased to Rs330 in the mini-budget amounting to an increase of 154 percent. Similarly, the rate of excise for a pack of Tier 2 cigarettes was increased from Rs41 to Rs101, amounting to an increase of 146 percent. Despite the drastic increase in both tiers, the Retail Price Threshold was increased by a meagre 35 percent to Rs9,000 per 1,000 cigarettes. This has created an unusual anomaly and has created a dead zone for any cigarette pack to be viably priced between Rs180 and Rs330. The representatives shared that between July ’21 till March ’22 PTC’s contribution to the national exchequer was Rs85 billion, whereas the revenue collected during the same period this year showcases a meagre increase of only 14 percent to Rs97 billion, despite an excise increase of over 200 percent in both tiers since June 2022. Such measures are constantly discouraging investment and are threatening the Large-Scale Manufacturing (LSM) sector in Pakistan. Such measures by the government are not sustainable for the LSM sector in the long term and will have detrimental effects on the economy. The representatives told the media that PTC contributes over 80 percent of the revenue collected from the tobacco industry whereas only 2 percent is contributed by the illicit sector.

During the media session, representatives from PTC highlighted that the sales volumes for March ’23 have completely flipped where legitimate industry sales stand at 1.84 billion sticks in March as opposed to 4.84 billion sticks in Jan ’23 (pre-mini budget). Similarly, the illicit volume has expanded exponentially from 2.85 billion sticks in Jan ’23 to 4.8 billion sticks in March ’23. This demonstrates a shift of 3 billion sticks from the formal sector to the illicit sector which has deprived the government of invaluable revenue at this trying juncture.

A sharp increase has been witnessed in the availability of smuggled cigarettes across the country at cheap rates, forcing the price-conscious consumer to cheaper smuggled illicit cigarettes. A 30 percent increase in sales of smuggled cigarettes was recorded during March. More than 100 brands have flooded the market which has no graphical health warning and do not conform to the laws of Pakistan. Furthermore, they sell with impunity, flouting all regulations set by the Government of Pakistan without fear of being caught.

An iron hold on the illicit sector by the enforcement agencies is a need of the hour to plug this growing gulf between the legitimate and illicit sectors. Track and trace implementation continues to be the silver lining only if it is implemented in full letter and spirit. A nationwide enforcement campaign to curtail the menace of illicit cigarettes must be consistent and not sporadic to ensure the right results for the already ailing economy.

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