The sale of Local Tax Evaded (LTE) cigarettes continues to be on the rise with statistics pointing at the prevalence of locally manufactured cigarettes in the market, priced at an average of Rs 27 per packet – an amount that is below the minimum tax per packet amount set by the government at Rs 39.69.
Latest data submitted by the industry to the Federal Board of Revenue (FBR) revealed that low segment tax-paid brands are priced at an average of Rs 57 per pack, whereas high segment tax-paid segments are priced at around Rs 110 per pack.
These brands face unfair competition from illegal brands that are sold at prices which are less than even half that of a legitimate brand due to the evasion of taxes. Most local manufacturers evade these taxes by under declaring their production so that they can sell their illegal cigarettes at prices lower than that printed on the pack.
The price gap between the two segments continues to increase annually and is fuelling the growth of illegal cigarettes in Pakistan.
Furthermore, in the last 4 years, taxes have seen a 100% increase which has resulted in tax-paid cigarettes becoming more expensive for the Pakistani household to afford, sources said.
The consequences of the rise in illegal cigarettes and theft of taxes affects four key components of our socio-economic fabric; the Government, the society, the consumers, and the tax compliant industry.
Industry data revealed that for the Government, in 2014 alone over Rs 24 billion in revenues was lost due to the illegal sale of cigarettes.
This lack of domestic revenue generation means that the Pakistani government must fulfil its public sector development agenda by seeking foreign aid and loans. While the foreign loans help to finance development projects, the attached terms and conditions limit the Government’s power to devise and implement autonomous economic policies.
Furthermore, the government may seek to increase taxes on the tax compliant industry to make up for the loss in taxes.
This increased tax burden makes the products of those tax compliant companies less competitive in the market leading to a dent in the foreign investment in the company.
FDI from the cigarette industry has already seen a decline and this trend will continue if measures are not taken to promise a level playing field.
As for the consumers, the massive price differential between illegal cigarettes and tax-paid cigarettes only serves to push consumers; especially the youth with lesser purchasing power, towards black market of cheap duty evade brands.
Illegal cigarettes are on the rise with more than 1 billion cigarettes added to the segment annually. Although the Government has empowered 13 agencies in Pakistan, there is a need to prioritize the importance to curtail the sale of illegal cigarettes.
Capacity constraints and the lack of co-ordination between different law enforcement agencies have also created a lax law enforcement environment for illegal cigarettes.
Since retail is the final stage where these illegal cigarettes are being sold to consumers without any check, there is a need for retail enforcement.
When a manufacturer supplies a pack to retailers priced at Rs 12 to Rs 15, illegal cigarette retailers are able to gain a more than 100 percent profit margin by selling that same pack at Rs 25 to Rs 35.
In comparison to such tax evasive brands, the profit margin on a duty paid pack is not more that Rs 3 to Rs 5 per pack.
For example, local manufacturers which produce brands such as Gold Street, Classic, Chance and Virtue – sell their cigarettes below the quoted price on packets to retailers.
These prices entice more consumers to purchase such LTE brands, resulting in higher profits for the local manufacturers and a more uneven playing field for the legitimate players in the industry.
By amending existing measures and creating new regulatory measures, the government can curtail the sale of LTE cigarettes. Currently, retailers are absolved from criminal liability for selling tax-evaded cigarettes.
Existing regulations such as the ‘Federal Excise Act and Rules’ should be amended to hold retailers responsible for selling cigarettes below the printed price. More importantly, the focus needs to shift to cracking down on cigarettes that sell below minimum tax.
In addition to amendments, new regulatory measures criminalizing the sale of illegal cigarettes with harsh consequences and fines can be a major deterrence for many retailers to engage in the retail of illegal cigarettes.
The rise in illegal cigarettes has serious implications for multiple actors in society including consumers, the tax compliant industry, and the Government. There is a need for a holistic approach with stronger regulations to criminalize the retail of Local Tax-evaded cigarettes, sources added.