After PTC, Philip Morris also shows concerns over smuggling, sale of illicit cigarettes 

ISLAMABAD: The Pakistani tobacco industry is facing major challenges as the sale of illicit cigarettes has spiked following a massive increase in federal excise duty. 

The concerns of the industry were highlighted by Pakistan Tobacco Company (PTC), and now Philip Morris, the country’s second major tobacco company, has also raised its voice against the smuggling and sale of illicit cigarettes

According to Muhammad Zeeshan, Chief Financial Officer and Executive Director of Philips Morris (Pakistan), the major increase in taxes on legal cigarettes has caused a huge jump in smuggling and the sale of illicit cigarettes. Pakistan is currently going through a very difficult period economically and Philip Morris Pakistan stands with the people of Pakistan with its deep commitment and firm determination in these challenging situations.

The government has imposed a ban on imports in order to reduce the pressure on foreign exchange reserves and to reduce the budget deficit, tax rates have been increased in the supplementary budget. Cigarettes are already highly taxed, and the recent increase in Federal Excise Duty (FED) has widened the gap.

FED has been increased three times this fiscal year, with the most recent increase being 150% in February, bringing the excise duty on cigarettes up to 200 percent. The impact of this significant increase in excise duty has started to set in on the legal cigarette industry, and the government itself will face the negative impact of this move in the form of reduced tax revenue from cigarettes.

Zeeshan stated that whenever the tax on legal cigarettes increases in Pakistan, the sale of illegal cigarettes also increases. The statistics for the first quarter prove that the sale of legal cigarettes has declined by 50%, whereas the increase in excise duty has benefited illegal cigarettes. The market share of illegal cigarettes was between 35 and 38 percent before the excise hike but has now reached 45 percent in just a month.

If the government does not take appropriate measures, the share may reach 50 percent. The legal industry has never opposed taxes or excise. However, such a high increase will not be in the interest of the legal industry and the government itself. The recent exorbitant increase in excise duty has doubled the price difference between legal and illegal cigarettes. With the rapid increase in illegal sales, it is estimated that the government will not be able to achieve the tax collection target of Rs 260 billion from the tobacco industry.

The decrease in legal cigarette sales will result in a meager collection of Rs 170 billion, a figure that the government can easily observe by analyzing the taxes collected in March. Moreover, the government is likely to miss the tax collection target by Rs 90 billion as a result of an abrupt increase in illicit tobacco sales following the increase in excise duty.

Pakistan has become the second-largest country in Asia in terms of the sales of illicit cigarettes following Malaysia. Malaysia currently holds a 50% market share of illegal cigarettes, while Pakistan’s share is 40%. However, there are concerns that Pakistan may surpass Malaysia and become the leading country in Asia due to the recent increase in federal excise duty.

Zeeshan said that without curbing the illegal cigarette trade, a significant increase in the federal excise duty rate will never be effective as the entire burden of taxes is being borne by the organized and legal cigarette industry, which already contributed around 98% of taxes collected from the tobacco industry.

He urged the government to apply laws uniformly to the entire industry, implement track and trace across all companies, and provide a business environment in which an organized tax-paying industry can thrive. The implementation of the track and trace system could help bring illegal cigarettes under the law, and the government can cover the revenue deficit more easily.