Smuggled cigarettes hurt local industry

ISLAMABAD - Unable to bear the brunt of huge smuggled cigarette volumes, the tax-compliant local cigarette industry is on the brink of devastation.
It merits mentioning here that compliant cigarette industry delivers nearly 37pc of total FED revenue and nearly 3.5pc of total FBR revenue.
Attributed to various factors, the sale of smuggled cigarettes has increased by more than 66pc going from 1 billion to 1.7 billion alone in current year. The overall illicit trade increased by around 11pc going from 19pc to 21pc of the market share. The sale of one smuggled cigarette brand alone, increased by 90pc. The unprecedented surge in illicit trade is proving proverbial last nail in the coffin for the tax compliant cigarette industry.
Earlier unable to cope with rising tax regime and higher cost of production Phillip Morris Pakistan Limited announced shutting down its Mandra facility near Rawalpindi.  The company attributed the decision to high taxation and availability of low priced tax evaded cigarettes and described the decision as “difficult, but necessary.”
While smuggled and counterfeit cigarettes make up 3pc of total cigarette trade, while locally produced non-duty paid cigarettes comprise 16pc of the total illicit cigarettes trade. The national kitty ends up with a loss of Rs 11 billion annually as a result of this practice. The tax-evaders take advantage of higher tax incidence in compliant industry which in certain cases goes up to 81 percent of each cigarette pack. Experts, who know optimal taxation and Laffer’s curve, believe that the optimal taxation point has been crossed and hence the drastic impact on complaint industry.
Any more tax burden would prove to be the proverbial last straw on camel’s back. Illegal cigarette manufacturers brazenly advertise their products that are less than Rs 15 whereas under the Federal Excise Law, issued pursuant to the Federal Excise Act 2005, the minimum selling price for a pack of cigarettes is much more than that. ‘Such advertisement and subsequent sale of such cigarettes are ample proof of tax evasion in Pakistan,’ said a senior industry analyst.
The simple question is: how can anyone sell a cigarette below the minimum price levied by Government and the only answer is through tax evasion.
Experts attribute various reasons for growth of local illicit trade. The illegal and non-tax units are located in far flung areas of the country where the implementation of laws is less stringent. There are more than 0.6 million outlets in the country where illegal brands are sold with impunity without any fear of law. Under declaration is another reason for sharp increase in illegitimate trade of smuggled and local tax evaded cigarettes.
Industry experts have suggested some useful measures to curb the menace of smuggled cigarettes as far as local manufacturing is concerned.
‘Disallowing sale of filter rods to unregistered manufacturers and constitution of Task forces comprising of local tax officials may be executed’ said an expert on condition of anonymity. ‘Setting up of mobile enforcement teams’, he went on to add ‘may help in stopping the leakage of much needed government revenues’. The choice before the government authorities is simple: either enforce the laws or face the consequences of living with a huge tax-evading sector in the economy.

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