Following enforcement actions of Inland Revenue Enforcement Network against illicit trade of cigarettes, the agency is taking new measures to completely eradicate distribution network of non-duty paid locally manufactured cigarettes.
Experts told Business Recorder here on Wednesday that the documented industry strongly acknowledges the performance of the IR Enforcement Network against the illicit trade during the current fiscal year. The government should continue with its policy of third tier taxation and step up enforcement measures against illicit cigarette trade as it remains a pervasive problem that hurts tax revenues and health objectives.
When contacted, FBR sources said that the FBR may retain the third tier (third slab of excise duty) on cigarettes in coming budget (2018-19) keeping in view reduction in the illicit trade of non-duty paid cigarettes. Prior to third tier of FED on cigarettes, the wide price gap between the legal and tax evaded cigarettes was key driver of demand for tax evaded cheap cigarettes. The third tier has been able to reduce this gap between the documented and non-duty paid cheap cigarettes, official added.
Industry sources said that a well-established distribution network of tax evaded cigarettes exists across the country. From distributors, cigarettes go to wholesalers and retailers and then finally reach the consumers. The wholesalers and retailers sell these illicit cigarettes openly throughout the country with little apprehension of being penalized by the law. The illicit cigarette trade is also common across key metropolitan cities like Karachi, Lahore, Multan and Faisalabad. These cities make up about 35% of the total illicit volume sold across Pakistan.
Moreover, smuggled cigarettes are used by elite class and mostly available in markets of urban centers. Till now, no consolidated efforts have been seen to check these smuggled items.
While the leading manufacturers are forced to comply with all legal requirements, these illicit cigarette manufacturers openly violate marketing restrictions and pricing code set by the government. Resultantly, consumers have been lured to smoke these cheap and readily available brands and there has been no reduction in smoking incidence in the country.
After careful deliberations in budget 2017-18, the FBR had adopted a policy stance to introduce the third slab of cigarette taxation as a way to boost revenue collection from documented sector and decrease illicit trade of non-duty paid smuggled/counterfeit cigarettes. At the end of the year 2016, the market share of illegal cigarette trade in Pakistan stood at 40%.
Over the past year, the FBR has intensified its enforcement efforts against smuggled and local tax evaded cigarettes by setting up Tobacco Squads to conduct raids across the country, leading to unprecedented crackdown on these tax-evaded cigarettes. In 2017, an estimated 1.63 billion non-duty paid cigarette sticks and raw material of illicit sector, worth billions of rupees, have been seized and while the enforcement network can manage to tackle supply side of the problem, other fiscal and regulatory measures like third tier were needed to ensure that the demand for illegal cigarettes is reduced.
Industry sources said that a market visit to the retail outlets and illicit hotspots shows the violations by the illicit manufacturers including selling below minimum price, though the cigarette packet mentions the minimum selling price set by the government, these packs can be purchased at a lower rate; cash incentive, discounts, gifts on pack purchase and pack redemption schemes offered to consumers; brand promotional material pasted outside the shops; usage of humans, animals in communication and sale to underage smokers.
They added that the tax-evaded cigarettes are still easily available at an average price of Rs25. This selling price is significantly below the minimum applicable tax, but there has been no action from Ministry of Health.
Key reasons for the widespread availability of smuggled cigarettes in Pakistan include demand factors like cheaper prices and no health warnings, and supply factors like fiscal and regulatory differential with Afghanistan, and higher profit margins for retailers, the experts added.