In Pakistan the incidence of illicit trade is very high at 18.4 % of the market in 2008, with Duty Not Paid (DNP) cigarettes being the major contributor.
These figures are based on the Retail Audit conducted periodically by international research agency Neilsen. According to one estimate the Government loses more than Rs. 7 Billion in taxes annually on account of illicit trade in cigarettes alone.
During fiscal year 2008/2009 the Government collected Rs 46.7 Billion from the tobacco industry. Pakistan Tobacco Company Limited and Lakson Tobacco Company Limited (LTC) have around 82% of the market share between themselves. These two companies paid close to 99% of the total revenue collected by the Federal Board of Revenue (FBR) of which our contribution was Rs 31.9 Billion. Pakistan Tobacco Company and LTC have 18 brands as opposed to the more than 100 brands manufactured by other manufacturers across the country. Some of these other manufacturers do not pay full duties and taxes creating issues related to a ‘level playing field’.
The absence of a level playing field affects the ability of the organised sector to increase prices regularly, in line with inflation, which is critical for the industry’s sustainability and meeting Government revenue targets.
Currently Pakistan has a 3 tier excise structure of which the lowest tier has a fixed excise duty incidence of Rs 9.5 for a pack of 20 cigarettes below a retail price of Rs. 20 (excluding Sales Tax). The minimum price, for the purpose of taxation, for a pack of 20 cigarettes has been stipulated under the Excise Act as Rs 19.49 (Retail Price + Sales Tax). Interestingly a number of brands available in the market sell below the total amount of Excise and Sales Tax applicable on the lowest price tier of cigarettes.
The FBR has revamped the legal framework and has initiated various administrative measures to combat illicit trade which has resulted in arresting the growing trend. However, containing this illegality will require sustained enforcement to bring all the manufacturers into the tax regime failing which the market share held by the illicit sector has all the potential to grow further.