In the next five years, total government revenue loss due to illicit cigarette trade is projected to be more than Rs 100 billion, which is over dollars one billion, according to Euromonitor estimates. Euromonitor International is the world leader in strategy research for consumer markets.
It has extensive network of strategic analysts in 80 countries providing the depth of global, national and local business information required in today's increasingly international business environment. Illicit cigarette trade and the illegal activities it promotes - including domestic tax evasion, counterfeiting and cross-border smuggling - present a complex problem for the government and the legitimate industry.
The total government revenue loss over the past five years due to illicit trade amounted to a staggering Rs 80 billion which is approximately equivalent to 11 percent of funds approved by federal government for Public Sector Development Programme (2011-2012).
In a bid to reduce smoking incidence among the citizens of Pakistan harsher taxation on cigarettes was implemented by the government in 2009 and 2010. Pakistan's smoking incidence, however, remained unchanged at 22 percent despite these consistent increases in tax rates.
It has been observed that given easy availability of cheaper albeit illegitimate cigarettes, price increases of legitimate cigarettes cause negligible impact on consumption patters or smoking incidence. Such tax driven price increases of legitimate brands create a natural market shift towards illicit cigarettes. This is especially prevalent in markets where average consumer, as is the case in Pakistan, does not possess high purchasing power.
This phenomenon underscores the ineffectiveness of deploying taxation measures without considering tax compliance culture and purchasing power of consumers. In the long run, high tax incidence is expected to exacerbate illicit cigarette problem as widening price differentials encourage even greater consumption of cheap illicit cigarettes. As a result, legitimate, tax-compliant cigarette manufacturers will experience further erosion in market share, directly resulting in increased tax revenue loses for the government.
Raids and seizures of illicit goods are reportedly rare; criminal prosecution for tax evasion, unlicensed manufacturing and other illegal activities, are rarer still. As of 2011, about 50 cigarette manufacturing units operate in Pakistan, most of which do not conform to tax policies. It would appear that government has not allocated adequate resources to crack down on these entities indulging in illicit activities. In 2011 alone illicit cigarette trade deprived national exchequer of Rs 18.5 billion in tax revenues.
Enforcement is also inefficacious along Afghan-Pakistan mountainous borders. Cigarettes continue to pour into Pakistan through these routes even though Afghan Transit Trade Agreement strictly prohibits their transit movement. Cigarettes and other dutiable materials which are ostensibly in transit from Pakistan to Afghanistan are illegally smuggled back into the former. These porous and extensive borders require active vigilance, sufficient manpower and basic technological resources for effective control.
Illicit cigarette trade is fast gaining a reputation for being a low-risk and high-reward business, enticing more "perpetrators-to-be" to its growing folds. Due to its high profit margins it is also considered in many parts of the world to be one of the major sources of funding for other criminal activities. Proceeds from illicit cigarette trade are typically used by organised criminal syndicates to fund other unlawful activities. These have the potential to cause massive social and national security problems and the same is also acknowledged globally.
In the World Health Organisation's Protocol to eliminate illicit trade in tobacco products (November 2012), it is recognised that illicit trade "undermines the economies of parties and adversely affects their stability and security." The said protocol also recognises "that illicit trade in tobacco products generates financial profits that are used to fund transnational criminal activity, which interfere with government objectives."
Government of Bangladesh, through effective on ground enforcement, has managed to drastically reduce share of illicit trade in total cigarette market from 24 percent in 1996 down to 3.5 percent in 2012.
Similarly, in Sri Lanka the share of illicit trade in the total cigarette market has drastically declined from 22.1 percent in 2000 to three percent in 2012 due to continuous enforcement measures taken by relevant government agencies.