Smuggled cigarettes have flooded the market in Pakistan, posing a serious threat to the government’s efforts to increase revenue receipts. In March, sales of smuggled cigarettes increased sharply by 30% due to a new tax policy, making them more appealing to price-conscious consumers. More than 100 brands without graphical health warnings and without complying with Pakistani laws are being sold with impunity, flouting all government regulations without fear of being caught.
The government increased excise duty on cigarettes in February, and March marked the first complete month of sales under the new tax regime. The industry witnessed a sharp increase in incidences of illicit cigarettes (produced in AJK) and smuggled cigarettes (from Afghanistan) specifically.
At a media briefing, representatives of the Pakistan Tobacco Company (PTC) shared the results of the recent increase in excise duty rates for the cigarette industry. They explained that before the announcement of the mini-budget in January, the excise duty on a pack of tier-1 cigarettes was Rs130, which was increased to Rs330, showing an increase of 154%. Similarly, the rate of excise duty on a pack of tier-2 cigarettes was raised from Rs41 to Rs101, a rise of 146%.
Despite the drastic increase in both tiers, the retail price was increased by only 35% to Rs9,000 per 1,000 cigarettes. However, it created an anomaly and dead zone for the cigarette packs priced between Rs180 and Rs330.
PTC contributes over 80% of the revenue collected from the tobacco industry, whereas only 2% is contributed by the illicit sector. The company representatives highlighted that sales volume for March 2023 had completely flipped, where legitimate industry sales stood at 1.84 billion sticks as opposed to 4.84 billion sticks in January 2023 (before mini-budget). Similarly, the sales volume of illicit cigarettes expanded exponentially from 2.85 billion sticks in January 2023 to 4.8 billion sticks in March 2023.
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“This demonstrates a shift of 3 billion sticks from the formal sector to the illicit sector, thus depriving the government of invaluable revenue at this trying juncture,” a company representative remarked.
PTC officials also emphasized that such measures were discouraging investment and threatening the large-scale manufacturing sector as they were not sustainable and would have detrimental effects on the economy. They called for an iron hold over the illicit sector by the law enforcement agencies to plug the widening gulf between the legitimate and illicit sectors.
It is clear that if the government fails to take decisive action against the sale of smuggled and illicit cigarettes, the revenue shortfall will continue to widen, leaving a huge dent in its efforts to increase revenue receipts. The onus is on the authorities to take immediate action and prevent further losses to the country’s economy.
