Since the government raised an estimated 154% in Federal Excise Duty (FED) on cigarettes the smuggling of cigarettes has increased by 39% in just two months.
The effects of this hike trickled down to taxes, causing a major hike in cigarette taxes, jolting Pakistan’s legitimate tobacco industry. As a consequence of cigarette prices hitting the roof, the tobacco market has been flooded with over 70 new brands of cigarettes during this short span of just two months.
During a media briefing session, on Wednesday, representatives of the Pakistan Tobacco Company Limited (PTC) disclosed that the incidence of illicit cigarettes has sharply increased due to the availability of smuggled cigarettes at cheaper rates. This has forced price-conscious consumers to turn to cheaper, smuggled, and illicit cigarettes.
PTC officials revealed that from within the period between July 2021 to March 2022, PTC’s contribution to the national exchequer was Rs 85 billion. However, the revenue collected during the same period this year only increased by a meager 14% to Rs 97 billion, despite an excise increase of over 200% in both tiers of cigarettes since June 2022. Such disappointing figures are constantly discouraging investment and are threatening the Large-Scale Manufacturing (LSM) sector in Pakistan.
The representatives informed that PTC contributes to around 80% of the total revenue collected from the tobacco industry, whereas only 2% is contributed by the illicit sector. The officials also revealed that sales volumes for March 2023 have completely flipped, with legitimate industry sales standing at 1.84 billion sticks in March, as opposed to 4.84 billion sticks in Jan 2023 (pre-mini budget). Similarly, the illicit volume has expanded exponentially from 2.85 billion sticks in January 2023 to 4.8 billion sticks in March 2023.
According to PTC data, more than 100 brands of smuggled cigarettes without graphic health warnings have flooded the market, blatantly disregarding all regulations set by the Government of Pakistan, without even fearing the possibility of getting caught. PTC officials recorded a 30% increase in sales of smuggled cigarettes during March 2023.
Enforcement agencies require an iron hold on the illicit sector to plug this growing cleft between the legitimate and illicit sectors. The implementation of track and trace must be consistent and in full letter and spirit. A nationwide enforcement campaign to curtail the menace of illicit cigarettes must be carried out to ensure the right results for the already ailing economy.
Before the mini-budget released in February 2023, the excise on a pack of Tier 1 cigarettes was 130 rupees, whereas it was increased to Rs 330 in the mini-budget, amounting to an increase of 154%.
Similarly, the excise on a pack of Tier 2 cigarettes was increased from Rs 41 to Rs 101, amounting to an increase of 146%. Despite the drastic increase in both tiers, the Retail Price Threshold was increased by a meager 35% to Rs 9,000 per 1,000 cigarettes. This has created an anomaly and has opened up a dead zone for any cigarette pack to be viably priced between Rs 180 and Rs 330.
Responding to a query, the officials stated that despite the letters sent to the ministry of finance for removing the anomalies in taxes that emerged after the mini budget, the ministry has not considered the request of industry.
