Tobacco industry sounds alarm as manufacturing drops by 40%

ISLAMABAD: The Federal Board of Revenue’s (FBR) Track & Trace System (TTS), a highly revered and advanced system that is said to have revolutionised the way in which taxes are levied, is facing some criticism by major tobacco companies amid an alleged surge in counterfeit cigarette incidents. It was noted that the system was unable to identify counterfeits with fake stamps on packs of leading brands. 

This criticism was levelled by senior officials from the tobacco industry who expressed dismay over the lack of enforcement measures, once again raising concerns about the sustainability of the sector due to an influx of smuggled and counterfeit cigarettes into Pakistani markets.

On Monday, Pakistan Tobacco Company (PTC) officials voiced their apprehensions, citing recent data from the Pakistan Bureau of Statistics indicating a 40% decline in the Large Scale Manufacturing (LSM) of the tobacco industry from July to November 2023. The decrease, as per PTC, can largely be attributed to an increase in counterfeit and smuggled cigarettes.

The Pakistani Tobacco Market:

But why has this counterfeit cigarette problem gone under the government’s radar for so long? And how has PTC grown concern for the national exchequer, a company that has rampantly made the case for a decrease in taxes on big tobacco?

There are two MNCs that operate in Pakistan’s tobacco landscape. One is the Pakistan Tobacco Company Limited (PAKL), which is the Pakistani subsidiary of British American Tobacco. The other company is Philip Morris Pakistan Ltd (PMPK).

Together, these two internationals control 60 percent of the market. But more importantly, they also pay 98 percent of the tax that is collected from this industry. That is where a major contention exists between the MNCs and the local players. 

There are an additional 52 tobacco companies in Pakistan that have 40 percent of the market share, and only pay Rs 2 billion in taxes every year (until FY22). To put this in context, this is only 2% of the total tax collected from the tobacco industry. 

This means that there is stringent competition between the two sides. So much so that the MNCs actually lobby for higher taxes that are more stringently imposed on the local growers and manufacturers. They believe that because they pay so much more tax while local producers do not, they have an unfair advantage that allows them to control 40% of the market share.

To be clear, large tobacco companies are not making these demands out of any sense of duty or goodwill. No, they want more people to smoke more cigarettes and given the chance, they would splurge on advertising, marketing, and packaging the product. 

Local tobacco growers sell their crops to local manufacturers, who then produce cheaper cigarettes of their own. Since they operate on a much smaller scale, they often fly under the radar and manage to market their products as well as not pay high taxes. 

This is why regularly the tobacco industry tries its best to make sure that these local manufacturers have to pay their taxes, and cannot market their products since that ends up stealing a sizable chunk of the market from. It is also important to mention that because of the very nature of how the untaxed local tobacco industry operates, it becomes difficult to gauge a market share. Over the years, experts have raised questions over the figures such as “52 companies” and “40% market share” as well.

Since the little guy has little to lose, a sizable part of the tobacco growth and cigarette sale goes under the FBR’s radar. It could be a smuggled cigarette, an unbranded or unregistered company’s cigarette, or a counterfeit in fake packaging. All these cigarettes cause harm to not only the national exchequer, but also the company or brand that they impersonate, in the case of counterfeits.

Big Tobacco’s Concerns

Qasim Tariq, Senior Business Development Manager at PTC, emphasised that despite stagnant cigarette consumption, cheap smuggled, and counterfeit local brands flooded markets nationwide. He claimed that, “Around 850 million counterfeit cigarette sticks are currently being sold across Pakistan, equivalent to 42.5 million packs with fake stamps, resulting in a substantial loss of approximately Rs5.7 billion to Pakistan.”

Tariq raised serious questions about the efficacy of the touted track and trace system, which has yet to be fully implemented across local cigarette manufacturers in Pakistan and Azad Jammu & Kashmir (AJK). PTC officials also urged Law Enforcement Agencies (LEAs) to intensify enforcement at the retail level to curb this rising menace.

Referring to an FBR report submitted to the parliamentary committee in 2019, PTC officials highlighted that illicit cigarette trade accounted for more than 36.2% of the country’s market share. They also presented counterfeit cigarette packs featuring fake T&T stamps available in the market.

Mr. Qasim underscored that revenue collections have declined between 2012 and 2016, following the government’s switch from a 3-Tier Structure to a 2-Tier Structure, which had been in place since 1992.

FBR’s Attempts

Meanwhile, a recent statement issued by the FBR on Monday, asserted that designated teams of Inland Revenue Service Officers successfully conducted a National Level Operation against illicit tobacco trade on 13th January, 2024. A total of 1,377 Packerites (13.77 million cigarette sticks) of non-duty paid/counterfeit cigarettes, both local and foreign brands, were seized. 

Member Inland Revenue Operations, Mir Badshah Khan Wazir, supervised the operation, emphasising that any evasion of government revenue would be met with stringent measures and culprits held directly liable for penal proceedings. Officials of the FBR indicate that over the past year the FBR has shown solid resolve to counter the illicit trade of cigarettes and it remains committed to the cause.