The illicit trade in cigarettes has reached to the alarming figure of 41 percent of the total market in Pakistan during last quarter (April-June) of 2016-17, according to the latest data compiled by the industry. Sharing situation of illicit trade in Pakistan, sources revealed that within the industry there had been a shift in volumes and market share from the legitimate industry to the illicit sector. Illicit trade in cigarettes is 41 percent of the total market in Pakistan. Illicit trade comprises locally produced tax evading cigarette brands and smuggled cigarette brands. Local tax evading accounts for almost 85 percent of the total illicit market and the remainder is smuggled.
Excessive excise led price increases have fuelled the growth of such tax evading cigarette brands. However, overall consumption has remained stable over the last five years, at 80 billion sticks.
Each year, the WHO, MoH and other anti-tobacco groups propose the governments for higher excise increases. Each year, the government conceded and increased excise and taxes on tobacco. Resultantly, the price differential between tax paying and tax evading brands grew to Rs 47. A legitimate packet is sold for Rs 72 whereas an illicit pack is sold for Rs 25. It is alarming to know that the minimum tax applicable per pack is Rs 43 and cigarettes are being sold for as low as Rs 15.
The illicit segment more than doubled its share and volumes, its contribution to the national exchequer remained a negligible 2-3% of the total revenue contribution by tobacco industry and there was a negligible impact on smoking incidence as consumers kept switching to low, tax evading brands and continue to do the same. More than 45 manufacturers are selling more than 145 brands in the market, evading the fiscal and regulatory laws of the country. Each year, due to illicit cigarette trade more than Rs 47 billion lost in the form of potential revenues.
The government has taken serious notice of this issue and has even formed an enforcement network against illicit trade. IR Enforcement Network has conducted major operations against the illicit trade of the industry. There are approximately 13 agencies and 25 laws in place to curb illicit cigarette trade.
The WHO itself states that illicit cigarette trade is a global phenomenon and is 10 percent of the entire global market, and is 50 percent or more is low and middle income countries. This is fast becoming true in the case of Pakistan, where illicit cigarettes are growing to become more than 50 percent of the market, if continued unabated.
Malaysia is an example where illicit cigarette trade is more than 50 percent of the market and legitimate players over there are either contracting or closing down operations altogether. Pakistan can see the effects of illicit cigarette trade as well. Revenue contribution to Federal Board of Revenue (FBR) has for the first time declined and is in shortfall of approximately Rs 40 billion. This is only set to decline further if legit industry volumes continue to decline and such a trend continues.