Karachi: In a sign that Pakistan’s struggle to curb illicit tobacco trade continues, a recent study says that more than 1 billion smuggled cigarettes are annually added to the local market, making it a lucrative destination for tax evasion.
“Over the last six years, the illicit trade has grown by 43.5%, and the tax-paid cigarette volume has declined by 11%,” says Nielsen, a global market research firm documenting consumer behavior in over 100 countries.
Illicit tobacco trade refers to the business of smuggled or counterfeit cigarettes or other tobacco products sold without paying applicable duties and taxes in the country of consumption.
“One out of every four cigarettes sold [in Pakistan] is smuggled, which is 137 basis points higher than the global average,” Nielsen says in its July-2015 study titled ‘The Challenge of Illicit Trade in Cigarettes: Impact and Solutions for Pakistan.’
In 2014, more than 19.5 billion smuggled cigarettes were sold in Pakistan, thus on average more than 1.6 billion smuggled cigarettes are sold in Pakistan every month, and this illicit trade continues to grow, the study says, estimating the share of illicit tobacco trade to be at least 23.7% of the country’s overall cigarette market.
In 2013, the report adds, Pakistan ranked fourth highest in Asia for smuggled cigarette trade as a percentage of the overall market.
The report says Afghanistan also plays a key role in the continued inflow of smuggled cigarettes into Pakistan. In 2014, more than two billion cigarettes were smuggled into Pakistan.
Of all smuggled cigarettes, local tax-evaded (LTE), which are extremely cheap, constitute the majority share – 21.1% or 17.3 billion sticks as of 2014 – according to the study.
Sharing details of its retail audit from a sample of 8,000 retail outlets, the study said the average selling price of LTE brands in Pakistan is Rs27 per packet, far below Rs33.80, the minimum tax per packet paid by the legitimate industry – a clear case of tax evasion.
On the other hand, it says most of the tax-paid brands are priced at Rs57 per packet.
The price differential between tax-paid and tax-evaded brands has doubled in the last four years alone, it said, fuelling the growth of LTE cigarettes, which account for 89% of the country’s total illicit cigarette trade.
Explaining its impact on the economy, the report says the illicit trade costs Rs24 billion to the exchequer in lost tax revenues and undermines the public health agenda by increasing the accessibility and affordability of tobacco products.
For example, during the five years (2008-2013), the smoking trend in Pakistan was only reduced by 0.2 percentage points because the volume had shifted from the tax-paid sale to illicit trade.
The illicit trade also creates an unequal platform for the legitimate industry, which accounts for 99% of total taxes and has a 76.3% share in the market.
The illicit trade, which constitutes 23.7% market share, pays less than 1% in taxes.
Measures for curtailment
The statistics above indicate that the share of the illicit tobacco market has been nearly a quarter of the overall market since 2012 and has hardly been reduced.
The government took various measures to curtail the illicit cigarette trade, besides legislation and an awareness campaign. The government also created the Anti-Illicit Trade Mobile Teams at Peshawar, Lahore, Faisalabad, Islamabad and Karachi field offices. These teams conducted various raids and helped the government increase revenues by Rs10 billion in fiscal 2013.
The government also claims to have detected the network of the illicit tobacco trade.
However, this latest study shows that the illicit cigarette trade is growing, which indicates that lax enforcement of fiscal and regulatory laws is the real hurdle in curtailing this trade. The tax watchdog, according to industry sources, is under-financed and underpowered.
Proposing solutions, the study said, law enforcement should include the establishment of a single, dedicated task force headed by a federal minister, and there should also be mobile enforcement units at the district level.
Besides expanding the customs capacity, there should be joint capacity-building workshops for law enforcement agency officials, it said.
