The government’s need to collect more money through taxation has put the cigarette industry on its hit list as the price of cigarettes made by lawful businesses climbed by around 250 percent due to the recent 153 percent Federal Excise Duty (FED) on cigarettes.
As Pakistani smokers are turning to illicit cigarettes as well as smuggled brands, you have to question the logic of massive increase in FED as the proliferation of illegal cigarettes in the country will make it impossible for the government to achieve its revenue targets to raise Rs 170 billion in additional revenue. The federal government is relying heavily on cigarette sector to generate new revenue of Rs 170 billion to cover the budget deficit.
Together with a significant increase in cigarette costs, the supplementary finance measure that the finance minister presented to the legislature today also calls for raising the sales tax. That, along with the excise tax, is more likely to encourage the already-existing market for illegal cigarettes while making no contribution to the public coffers.
According to a market survey, cigarettes of smuggled brands were found to be sold at a lower price of Rs 50-100 per pack than locally produced illegal cigarettes.
Increasing the price by Rs 30 was a clear violation of government price regulations by a local illegal cigarette brand. On the other hand, raised the quantity of cigarettes in the box and is currently charging Rs 150 for a pack of 25 sticks with new packaging.
Other cheap and illicit brands were also found to be sold without health warnings in fancy and persuasive packaging, which is in violation of the country’s tobacco control laws.
The consumers said that inflation has increased the problems of people addicted to smoking, and now it is not easy for them to buy cigarettes from legal cigarette brands.
In response to the dramatic increase in FED, Philip Morris Pakistan Ltd., one of the largest multinational tobacco companies in Pakistan, asserted that the most recent increase in FED on cigarettes by more than 150% will result in a price increase of more than 250% when compared to the prices of cigarettes in the financial year 2022. (Q1, 2022).
“The proposed unprecedented tax hike for the tax-paying tobacco companies will effectively favor the already vast illicit cigarette manufacturers in Pakistan. 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 it has often been seen in the past, “said spokesperson Philip Morris Pakistan Ltd in a statement.
According to cigarette industry sources, the legitimate industry has been very clear on the stance that excise led price increases give rise to the sales of the illicit cigarette sector which still continues to operate in Pakistan.
As per details, around 40 firms in KPK and AJK make more than 200 illicit cigarette brands. These businesses charge between Rs 35 and Rs 60 each pack of cigarettes for the goods they sell. The rule that plainly specifies that cigarettes cannot be sold for less than Rs. 70 per pack of 20 cigarettes is still openly flouted by them. Nonetheless, these businesses get away with the infraction since they are not monitored by the authorities. The legitimate industry on the other hand, has to ensure compliance to the fiscal law and increases the price of cigarettes, which results in consumers down trading from legitimate company brands to illicit sector brands. As a result, sales of illicit/undocumented brands increase. Currently, this loss is estimated at more than Rs. 70 billion/year according to various tobacco brands.
The industry sources believe the recent excise increases are detrimental to the legitimate companies’ survival as their sales decline; they are forced to shut down their manufacturing units and, in some instances, shut down their businesses from the country as well.
Presently, the legal sector accounts for 60 to 65% of the global cigarette industry and pays more than $150 billion in taxes annually, while the illegal sector, which accounts for 35 to 40% of the market, only pays Rs. 2 billion.
