ISLAMABAD: The total revenue losses to the national kitty will go up to Rs100 billion with share of illicit cigarettes and possibility of imposition of health levy on annual basis, according to the estimates of documented tobacco companies.

The representative of formal tobacco sector's company told journalists here on Thursday that the share of illicit cigarettes in shape of locally tax evaded, smuggled and counterfeits have been increasing, causing total losses of Rs76 billion to the national kitty.

If the government moves ahead with imposition of Rs10 per pack as health levy, this will cause loss of Rs20 to 24 billion to the national kitty because the cigarettes of formal sector will become expensive, while prices of brands of illicit cigarettes will remain unchanged, so their share would further go up.

In totality, the losses to the national kitty could touch Rs100 billion mark on annual basis.

They said that they did not agree with this assertion that the share of illicit cigarettes stood at 16 to 18 percent equivalent to Rs24 billion as described by the FBR's Member during recently held workshop. They were of the view that the experiment of healthy levy remained unsuccessful in many countries like Vietnam, Egypt, Bangladesh, and others.

The tobacco sector has come up with invisible identifier and introduced an app with name of Digimarc in order to identify logo of real pack of cigarette.

The law enforcement agencies could use this technology to identify illicit cigarettes packet.

The share of illicit trade of cigarettes, they said, increased after abolishing three-tier slabs.

The local tax-evaded cigarettes; smuggled cigarettes and counterfeit cigarettes have combined market share of 37 percent having a revenue loss of Rs70 billion per year.

Out of 37 percent, the market share of local tax evaded cigarettes is nearly 29 percent; smuggled cigarettes 2-3 percent, and market share of counterfeit cigarettes now stood at 6-7 percent.

The successive increases in excise duty, including removal of three-tier structure led to a collapse in duty-paid cigarette market share.

During the last 18 months, excise duty has been increased by more than 93 percent, including as a result of reintroduction of two-tier structure [from Rs854 to Rs1650].

Such unprecedented increase in excise duty has reduced the market share of duty paid cigarettes with a corresponding increase in market share of duty not paid cigarettes, which stood at 37.6 percent as of March 2020.

The relative price difference between the cheapest duty paid cigarettes and the DNP (Duty Not Paid) market more than doubled (from 19 to 40 PKR).

The enforcement measures have so far failed to curb the increase in market share of duty not paid sector.

The government intends to introduce track and trace system. However, its success is dependent upon across the board implementation enforcement to check at retail level.

The counterfeit cigarette trade has also increased to approximately 2.75 billion sticks per annum, which is in addition to market share of duty not paid cigarettes.

Total cigarette consumption has remained stable despite excise rate increases.

In Tier-1, the excise rate has increased by more than 30 percent, which has shifted some of the volume to smuggled cigarettes not sporting the statutory health warning.

Duty not paid cigarettes do not conform to regulations governing legal trade.

The operational sustainability of legit sector is at risk due to successive excise increases.

The increase in government revenues due to excise increase is short term as once the consumption shifts to illicit sector; the government revenues are bound to fall as witnessed in 2016-2017.

Any additional taxes in any form will only create further problems for legal sector, and reduce the government revenues.

The illicit cigarette manufacturers operate at a price range which is below the "minimum pack price" applicable in the country, if the same product is duty paid [i.e. Rs62.76 per pack]. This gap needs to be reduced. Second, the duties and taxes per pack amount to Rs42.

Duty not paid cigarettes are being sold below this thereby evading taxes and duties in addition to not conforming to the health regulations governing legal trade, which requires rationalising excise rates.

Federal excise duty on un-manufactured tobacco [which was reduced to Rs10/kg through Finance Act 2019] needs to be increased to at least Rs500/kg.

Further, the rate of adjustable advance income tax on tobacco from currently five percent to 10 percent.

Copyright Business Recorder, 2020