Legal Tobacco Industry irked by a hike in Taxes

The tobacco industry says that the recent increase in taxes for tax-paying tobacco companies will help the already large number of illegal cigarette makers in Pakistan.

A spokeswoman for Philip Morris Pakistan Ltd. said that the proposed unprecedented tax hike for the tax-paying tobacco companies will effectively favor the already vast illicit cigarette manufacturers in Pakistan.Philip Morris records Rs 1.7b profit in six months

He further said that this will also lead to significant shortfalls in government revenue as the volumes will massively shift from the tax-paid sector to the non-tax-paid sector, as often seen in the past.

During the period 2019-2021, the FED increase was to the tune of 26%. During the current fiscal year 2022-23, FED on cigarettes was already increased by 25%.

The latest announcement increases FED on cigarettes by greater than 150% which will result in a price impact of more than 250% for adult consumers versus Q1, 2022.’, He added.

Some other players in the tax-paying tobacco industry say that the legitimate industry has been very clear on its stance that excise-led price increases give rise to the sales of the illicit cigarette sector, which still continues to operate in Pakistan.

There are more than 200 illicit cigarette brands being produced by 40+ companies in KPK and AJK which are selling in a price range of Rs. 35 – Rs. 60 per cigarette pack.

They continue to openly flaunt the minimum mandated price law, which clearly states that cigarettes cannot be sold for less than Rs. 70 per pack of 20 cigarettes.

The legitimate industry, on the other hand, ensures compliance with fiscal law and increases the price of cigarettes, which results in consumers switching from legitimate company brands to illicit sector brands.

As a result, sales of illicit/undocumented brands increase, which results in a loss to the government exchequer. Currently, this loss is estimated at more than Rs. 70 billion/per year.

During the current fiscal year 2022-23, FED on cigarettes was already increased by 25%.

The latest announcement increases FED on cigarettes by greater than 150% which will result in a price impact of more than 250% for adult consumers versus Q1, 2022.

Such exorbitant excise increases are detrimental to legitimate companies’ survival. As their sales decline, they are forced to shut down their manufacturing units and, in some instances, their businesses in the country as well.

In Pakistan’s case, with the recent excise increase, if legitimate companies are forced to close, the government will lose more than Rs. 150 billion per year of revenue, more than 75,000 jobs will be lost directly and indirectly and last but not the least the loss from evasion by the illicit sector will increase to hundreds of billions of rupees.

Currently, the legitimate sector holds 60–65% of the cigarette market share and pays more than Rs 150 billion in taxes every year, while the illicit sector, which holds 35–40% of the market share, pays only Rs. 2 billion in taxes every year.

The government should first ensure that the measures being taken to counter illicit sector brands are firmly in place and are providing the right output e.g. track and trace has been implemented to counter illicit however, only 3 companies have implemented it, while 7 companies have gone to the court against it and the remaining have not implemented it on one pretext or the other.