EDITORIAL: The tobacco manufacturing industry is the single largest contributor to the Federal Board of Revenue’s (FBR’s) Federal Excise Duty (FED) collection with a 37 percent share in FY2022. Likewise, it also features in the top seven of major General Sales Tax (GST) contributors with a 3 percent share.
The sector contributed Rs150 billion in duties and taxes in FY2022 – behind only the petroleum and electricity sectors. Yet, it continues to face criminal neglect from policymakers and enforcers as illicit, counterfeit, and under-reported cigarette sales are believed to have touched new highs of late.
The two multinational companies (MNCs) namely, Phillip Morris (Pakistan) Limited and Pakistan Tobacco Company recently lashed out at the FBR for its continued failure to fully implement the track-and-trace (T&T) system rolled out in July 2021, with the stated objective of “reducing counterfeiting and preventing the smuggling of illicit goods through the implementation of a robust, nationwide, electronic monitoring system of production volumes and by the affixation of billions tax stamps/barcodes on various products at the production stage”. As things stand today, the FBR does not even appear close to achieving the objective.
As is the case with most taxed sectors, entities, or individuals in Pakistan, the FBR appears to be a firm believer in squeezing the compliant and honest taxpayer to the fullest extent possible. For context, only two MNCs have the T&T system implemented, out of a total of 52 cigarette manufacturers, as they have obtained stay orders from the courts against the implementation of the T&T system.
The two T&T system-compliant MNCs combined pay 98 percent of the industry’s taxes and duties, with a market share of 60 percent. If this isn’t a damning indictment of the FBR’s complete failure, then nothing is.
Industry players divide illicit cigarette trade in Pakistan into two broad categories. The first one is termed “duty-not-paid” on locally manufactured cigarettes, as under-declared production finds its way to the retail stores and is largely sold below the minimum price threshold. The category is believed to have no less than 33 percent of the total market share.
The other category is “smuggled” brands that typically come via Afghanistan. With the most recent episode of tax and duty hike on tobacco, market sources claim that the market share of smuggled cigarettes has reached an all-time high, with as many as 70 new brands introduced in less than three months. Anecdote supports the claim as the typical nook-and-corner cigarette hawker now carries brands never heard of before at substantially cheaper prices than those of the established Pakistani brands.
The fact that cigarette production has gone down by 27 percent year-on-year in 11M FY23 further validates the claim. The share of two MNCs is believed to have dropped more than the industry-wide sales dip, being at the receiving end of higher duties.
It is hard to imagine that smoking habits have changed all of a sudden, coinciding with the rise in duties, especially in the presence of numerous alternatives, at all tastes, and price points. Any attempt to rationalise tobacco taxes viewed with the lens of revenue only will prove counter-productive unless it is done in tandem with sincere efforts to curb smuggling and enforce T&T system.
Copyright Business Recorder, 2023
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