Revenue losses run into billions: tough steps against illegal trade of cigarettes in the offing

The Federal Board of Revenue (FBR) in the light of an international report on illicit tobacco trade has decided to introduce new enforcement measures in the upcoming budget (2015-16) to check illegal trade and consumption of cigarettes in the country, sources told Business Recorder. The country in the wake of illicit trade and consumption of cigarettes has suffered revenue losses to the tune of Rs 26.2 billion (US $253 million) in 2013-14, they added.
According to the sources, the FBR is likely to enhance the role of the Directorate General of Intelligence and Investigation Inland Revenue & Directorate General of Intelligence and Investigation Customs in checking the illicit trade of the cigarettes in the country. Referring to the report titled "Asia-14 Illicit Tobacco Indicator 2013", the sources said that it is aimed at providing policy-makers and administrators with an objective and independent annual benchmark on illicit tobacco trade and its impact on government revenues. The report has been prepared by the International Tax and Investment Center and Oxford Economics in September 2014, they added.
Elaborating, the sources said that estimates indicated that the tax losses associated with the illicit consumption of cigarettes in the fiscal year 2013-14 stood at Rs 26.2bn (US $253m). The estimated tax losses were 2.5 per cent lower than Rs 26.9bn (US $275m) as against the estimates of 2012, they pointed out. Quoting the report, the sources said that Pine cigarette remained as one of the top brands having the highest contribution in terms of volume to the unspecified cigarettes in 2013 in Pakistan.
According to the report, illicit cigarettes in Pakistan are mostly domestically produced with around 82 per cent share for domestically produced illicit in total illicit consumption. The study is an update and expansion of our previous research, 'Asia-11 Illicit Tobacco Indicator 2012'. In light of newly available data, it has been made possible to extend the coverage to include Cambodia, Laos, and Myanmar, resulting in full coverage of the 10 ASEAN member countries plus Australia, Hong Kong, Pakistan, and Taiwan. Nearly three quarters of illicit consumption occurred in just three markets: Pakistan (22.8pc), the Philippines (18.1pc) and Vietnam (20.7pc). However, Pakistan, and Singapore saw noticeable decline in the share of illicit consumption in 2013, the former as result of declining non-domestic illicit volumes, and the latter a consequence of a decline in contraband. In both cases, however, the share of illicit consumption in total consumption remained much higher than the Asia-14 average, it added.
The report further said that the cigarette prices are relatively low in Pakistan, but have risen sharply in recent years driven by successive large excise-tax increases. Despite this, the price of the most sold brand at US $0.4 per pack is still much lower than in neighbouring India (US $1.8) and China (US $1.1).
It said that the total consumption (legal and illicit) in 2013 stood at 82.6 billion cigarettes, down by 4.0pc from 2012. Of this, an estimated 77.1pc or 63.7bn cigarettes is legal domestic consumption, 0.1pc (non-domestic legal), and 22.8pc or 18.8bn cigarettes (illicit consumption). The rise in non-domestic illicit was offset by a large decline in domestic illicit, which accounted for the fact that total consumption fell by more than legal domestic consumption.
Domestic illicit consumption again accounted for a significant proportion of total illicit consumption in 2013, contributing 82pc to total illicit consumption of cigarettes. The share of domestic illicit consumption in total illicit consumption fell five percentage points, with non-domestic illicit consumption increasing by 14.8pc, from 3.0bn cigarettes in 2012 to 3.4bn cigarettes in 2013. Outflows of domestic duty-paid cigarettes to the other 13 markets are estimated to be very low, the report said.
It further added that the unspecified market variants constitute the largest proportion of non-domestic illicit cigarettes in Pakistan while duty-free products originating from other destinations in South Asia were also identified in the EPS, as well as cigarettes originating from Afghanistan. "Illicit consumption of cigarettes in Asia-14 was an estimated 10.9pc of total consumption in 2013. In nine markets (Australia, Brunei, Hong Kong, Malaysia, Myanmar, Pakistan, the Philippines, Singapore, and Vietnam), illicit consumption was found to be higher than the Asia-14 average, which is weighted down by the relatively low level of illicit consumption in Indonesia, the largest market by total consumption (accounting for 40.8pc of total consumption in Asia-14)", the report said, adding: "By contrast, a number of markets have experienced a decline in illicit consumption as a share of total consumption and the largest in this category was in Singapore, where the share of illicit consumption in total consumption fell by six percentage points, from 25.6pc in 2012 to 19.6pc in 2013. Declines in illicit consumption as a share of total consumption also occurred in Hong Kong, Pakistan, and Thailand."
In Pakistan, Singapore, Hong Kong, and Thailand, illicit consumption has declined both in terms of volume and as a share of total consumption. Pakistan experienced the largest volume decrease in illicit consumption, with illicit consumption falling by 3.0bn cigarettes in 2013, driven by a fall in the consumption of domestic illicit cigarettes of 3.5bn cigarettes. As such declines in illicit consumption resulted in a fall in the estimated tax loss in Hong Kong (-2.4pc), Pakistan (-2.5pc, Singapore (-24pc), and Thailand (-28.1pc), report said.
It further pointed out that the domestic and non-domestic illicit trade both contributed to the rise in illicit consumption across Asia. The largest rise in domestic illicit consumption occurred in the Philippines, where domestic illicit rose by 181.2pc in 2013. By contrast, Pakistan saw a significant reduction in domestic Illicit (-18.4%). Moreover, the volume of non-domestic illicit cigarettes consumed rose in six markets (Australia, Indonesia, Pakistan, Philippines, Vietnam, and Taiwan), the report said, adding markets with low non-domestic legal inflows tend to be low-priced markets such as Pakistan, Philippines, and Indonesia.
Meanwhile, cigarette manufacturers have recently informed the tax authorities that 24pc of the market share has been captured by the cigarette manufactures of Khyber Pakhtunkwa and Azad Kashmir and as such the losses of tax-paying industry have been increasing with each passing day due to the presence of such informal sector operating in KPK and Azad Kashmir.