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September 1st, 2013:

Illicit trade of cigarettes costs exchequer Rs20 billion a year

Euromo­nitor and FBR offici­als say market is floode­d with smuggl­ed, non-duty paid brands in absenc­e of law enforc­ement.

Published: September 1, 2013

Study by Euromonitor and FBR official say market is flooded with smuggled, non-duty paid brands in absence of enforcement.


Pakistan has been ranked as one of top three countries in the Asia Pacific region where illicit trade of cigarettes has been increasing due to multiple reasons, including the Federal Board of Revenue’s preference for manual approach to digital mapping. This is causing roughly Rs20 billion a year loss to the national exchequer.

In absolute terms, the amount may not seem big enough to raise concern, but is significant when seen in the context of tax evasion going on under the (loose) noose of the authorities. In financial year 2011-12, the cigarette industry contributed about Rs66 billion to the exchequer on account of excise duties and sales tax, as it remains one of the highly-taxed industries.

Two studies by Euromonitor International – a global research agency – and Directorate of Intelligence and Investigation (I&I) of Inland Revenue Division of the FBR have estimated losses of around Rs20 billion per annum in tax revenue, where 85% is because of tax evasion, due to illicit cigarette trade.

The estimates are based on total production of tobacco, its consumption in cigarette manufacturing, evasion of duties on account of smuggled, counterfeit cigarettes and non-duty paid cigarettes.

In its report on cigarette industry of Pakistan, issued earlier this year, the Euromonitor estimated that Pakistan has lost Rs80 billion worth of duties and taxes in the last five years and is expected to lose another Rs100 billion in the next five years.

The study showed that cigarette sales continued to drop in 2011 as sales of illicit cigarettes rose. A lack of strong enforcement of laws on the part of the government has left the legal market defenceless against illegal players, it continued.

The study said markets across the country are flooded with smuggled cigarette brands, in the absence of any strict enforcement of laws and regulations.

According to Euromonitor International, Pakistan ranked third in illicit cigarette trade in Asia Pacific countries, behind Malaysia and Hong Kong last year.

Ansar Javed, former chairman of the FBR, who also worked to curb cigarette smuggling in his capacity as director general of Directorate of I&I of Inland Revenue, said lack of coordination and lack of transparency in FBR’s affairs was one of the main reasons behind the tax machinery’s inability to crack down on illicit cigarette trade.

He said according to a scientific study by the I&I, tax losses due to cigarette smuggling, counterfeit manufacturing and duty evasions were in the range of Rs18 billion to Rs20 billion per annum.

The solution to the problem was digital mapping of cigarette packaging instead of relying on manual methodologies, said Javed. Parliament has approved a law to allow the FBR to go for digital mapping, but much needs to be done before enforcing the act aimed at curbing the smuggling.

The Pakistan Peoples Party (PPP) government also worked on a proposal to paste stamps on cigarette packs to identify smuggled, non-duty paid packets for checking tax evasion. However, it could not be implemented.

According to the country’s laws, penalties for the sale of smuggled cigarettes include confiscation of such cigarettes, fine up to Rs50,000, recovery equal to 500% of unpaid taxes and imprisonment up to five years.

According to a top official of the Directorate of Intelligence and Investigations of Customs, both the domestic producers and multinational companies (MNCs) were involved in evading taxes on cigarettes. The MNCs were involved in technical evasion while the local producers were evading duties on counterfeit cigarettes, he added.

He said the Customs does not have the capacity to stop cigarette smuggling on international borders and was trying to curb the menace by raiding on retail shops and warehouses. He said the volume of smuggled cigarettes was less than 5% of the total cigarettes produced, but when compared with consumption of billions of cigarette sticks, the size of evasion becomes abnormally large.

During the second half of 2012, I&I of the Inland Revenue seized millions of untaxed cigarettes. The confiscated cigarettes included both locally manufactured and foreign brands.


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