Illicit trade in cigarettes causes revenue losses in excess of Rs. 7 Billion to the Government
The presence of a large and unorganised tobacco sector is impeding the delivery of both the Government and the legitimate industry's revenue targets. This undermines the viability of the legitimate players in the industry and is one of the major factors in discouraging foreign investment.
Illicit Trade is the supply, distribution and sale of smuggled or counterfeit tobacco products, or tobacco products on which applicable duties and taxes in the country of consumption have not been paid. Illicit trade essentially takes three forms:
The first is importation for commercial use, also known as International Transient Brands (ITBs), of tobacco products on which payment of applicable taxes, such as duties, excise and sales tax is evaded in the country of consumption. These products may have had no taxes paid on them at all, or may have had lower taxes paid in another country.
The second is undeclared local production or Duty-Non-Paid (DNP) whereby products are produced and consumed within the same country but without payment of all local taxes. These products may be manufactured in approved factories but not declared to the authorities, or they may be manufactured in illegal covert operations.
The third is counterfeit products which are also an infringement of Intellectual Property Rights (IPR). These are products which are intended to be identical or near identical copies of a genuine branded product and its packaging so as to appear as the genuine product. By definition such products are illegal, as the manufacturer is not authorized by the brand owner to use the counterfeited brand assets. Counterfeits may be produced for the local market or exported.
Pakistan Tobacco Company has always worked closely with the Government to implement laws and regulations (legislation) to ensure a 'level playing field' for all the companies in the tobacco sector. As a result, the share of the market held by the illicit sector has come down to 18.4% of total cigarette sales, which is still high given local market dynamics. The net loss to the national exchequer is estimated at Rs. 7.46 billion per annum assuming that all the illegitimate products sell at the minimum price determined by the Government for the purposes of tax collection. The loss to the legitimate industry amounts to over Rs. 2.0 billion per annum.
The measures taken by the Government to control illicit trade in cigarettes are as follows:
- Printing of manufacturer’s name and retail price
- Third party audits
- Destruction of machinery and confiscation of conveyance used for counterfeit products
- Disclosure of bank accounts
- Submission of audited bank accounts to FBR
- Sealing of excess capacity
- Installation of CCTV cameras