Hit by taxation, Philip Morris faces 10.89% decline in sales

LAHORE: Reeling from soaring cigarette prices because of added taxation, one of Pakistan’s two big players in the tobacco industry, Philip Morris, marked a 10.89% decline in their sales from the same time frame last year. The company revealed the statistics on their half-yearly results. 

The decrease in sales had a direct impact on the net profits for the company for these months, it fell to Rs 37.2 crores from Rs 1.53 billion which is a 76% decrease in profits. Similarly, in the first quarter, the company faced a 102% decrease in profits, which is directly proportional to the sales which decreased by 33% in the first quarter compared to similar period last year.

This was during the time the government released the mini-budget in February 2023, skyrocketing the prices for cigarettes and the taxes on each pack. To put the numbers from the Philip Morris report in context, according to an article published on Profit earlier, the Pakistan Tobacco Company (PTC) officials revealed that “sales volumes for March 2023 were around 1.84 billion sticks, as opposed to 4.84 billion sticks in Jan 2023 before the mini-budget was released”.

Following that, tobacco companies in Pakistan announced an increase in cigarette prices of 250% per pack since the implementation of the government’s Rs 170 billion mini-budget. It incorporated a rise in sales tax from 16% to 17%, along with a 150% surge in federal excise duty (FED) on cigarettes. Various cigarette brands, such as Marlboro, Gold Leaf, Capstan, and Gold Flake were then being sold for around Rs 500-550 per pack.

This increase in FED allowed local non-tax-paying tobacco companies to expand their business by selling these cigarettes at an average price of Rs 100 per pack which is significantly below the legal minimum price. PTC additionally revealed that over 100 illicit cigarette brands lacking graphic health warnings had inundated the market. These brands brazenly ignored all regulations established by the Pakistani Government, displaying a complete lack of concern about the potential of facing consequences.

As of recently, Philip Morris Pakistan has set the retail price of one of its cigarette brands below the stipulated Federal Board of Revenue (FBR) rate of Rs 330 for FED of Tier-1. As per PMI, the retail prices for Marlboro Advance, Royals, and Marlboro Gold will be Rs326.27, Rs118.64, and Rs409.32 per 20-cigarette pack, respectively. 

To put this in perspective, the Federal Excise Act 2005 states that selling cigarettes below the retail price plus sales tax is an offense. Offenders can be fined up to twenty thousand rupees or a hundred thousand rupees under clause (b), with imprisonment up to five years. The Marlboro Advance's retail price is now compliant with the Act.

Earlier, the Managing Director of Philip Morris Pakistan complained about the illicit tobacco companies stating that an implementation of track and trace must be consistent and carried out rigorously to ensure the right results for the legit industry. In addition to this, Philip Morris Pakistan Executive Director and Chief Financial Officer Muhammad Zeeshan in May referred to a EuroMonitor research during a press conference stating that Pakistan held approximately 40% market share of illegal cigarettes in 2022, solidifying its position as the largest illicit cigarette market in South Asia.

With that being said, tobacco company officials had stated that despite the complaints to the Ministry of Finance addressing the need to rectify the tax discrepancies that arose following the mini-budget, the ministry has not taken into account the industry's appeal.

Philip Morris Pakistan saw a significant drop of 70% sales and 60% reduction in production volume during March and April 2023. This negative trend is expected to persist due to the increase in the prevalence of illicit cigarettes. According to earlier reports, it has been stated that the tobacco sector contributes a significant 98% of the total tax revenue from the tobacco industry, whereas the illicit cigarette manufacturers contribute only 2%. It also holds a total market share of 40% as of now, which is projected to rise to 50% if left unchecked. This will then make Pakistan one of the largest illicit cigarette markets worldwide.