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Cigarette industry: ‘FBR should tie revenue projections to market share’

A leading cigarette manufacturer Thursday conveyed to the Federal Board of Revenue (FBR) that revenue projections for documented industry for 2015-16 should be set taking into account expansion of market share, up to 24 percent of informal sector, which consist of counterfeit and non-duty paid cigarette from KP and Azad Kashmir.

Sources told Business Recorder here on Thursday that officials of a cigarette manufacturing unit met the tax authorities at the FBR House to discuss the revenue implications of the illicit and counterfeit cigarette. The projections of sales tax and Federal excise Duty (FED) revenue for 2015-16 should be set for the cigarette industry duly taking into account the facts and figures of counterfeit and non-duty paid cigarettes coming from KP and Azad Kashmir. They opined that loss of the company has increased in 2014-15 due to presence of counterfeit and non-duty paid cigarette of KP and Azad Kashmir.

Tax authorities were informed that 24 percent of the market share has been captured by the cigarette manufactures of KP and Azad Kashmir. Resultantly, the loss of the company is increasing day by day due to presence of such informal sector operating in KP and Azad Kashmir. They further informed the market share of the documented industry is shrinking, resulting in revenue loss from the said sector. Meanwhile, Minister (Trade), Washington D.C., Embassy of Pakistan, USA has informed the FBR that he recently held a meeting with the Vice President, Phillip Morris International, wherein, the organisation showed its interest in increasing their portfolio by investing a fresh $100 million in Pakistan, besides, looking to work with the Government of Pakistan in curbing illegal tobacco trade.

A report on illicit trade in tobacco products in Pakistan shared by Phillip Morris with the FBR revealed that two manufacturers contribute over 99 percent or Rs 85 billion ($850 million) of excise and sales taxes collected from this sector, based on the legal volume of 62.7 billion sticks. The tobacco industry is the largest contributor to Pakistan’s Excise tax base.

The magnitude of the illicit trade revealed that there are three sets of independent references available to measure the volume and incidence of illicit trade in Pakistan, namely Nielsen, Oxford economics and Euro-monitor. The ITIC & Oxford Economics (OE) Asia-14: Illicit Tobacco Indicator 2013 report – a pan-Asia study, indicates that nearly 1 out of every 4 cigarettes consumed in Pakistan is illicit. The volume of illicit cigarette consumed in Pakistan is the third largest in the region at around 19 billion cigarettes. This represents more than the total legal sales in Malaysia and Singapore combined. Furthermore, the loss to government revenue in fiscal year 2013/2014 is estimated at Rs 26.2 billion ($253 million), Phillip Morris said. Looking at trends, the Nielsen monthly retail trade audit shows a steady increase of illicit cigarettes sold in Pakistan over the past five years.

Finally, the recent passport report issued by Euromonitor estimates that the incidence of illicit cigarette consumption has regularly increased in the past five years to reach 31.1 percent of the total consumption, ie nearly 1 cigarette out of 3 cigarettes consumed:

Further, according to Euromonitor International, “The Pakistani government reportedly lost $275 million in fiscal year 2012-2013 in potential taxes as a result of illicit tobacco trade. The amount is 17 percent of the country’s current account deficit, which stood at $1.58 billion in the first six months of full year 2014″. The nature of the issue is that the consumption of illicit cigarettes is, in its vast majority, composed of domestic illicit cigarettes (under-declaration): These are cigarettes produced to be illegally sold and consumed in the domestic market. In Pakistan, the under-declaration of manufacturing volumes is carried out by small local manufacturers who, by doing so, evade the payment of the excise duty and the sales tax, thereby allowing them to price their cigarettes below the minimum legal price (Rs 42 per pack of 20 cigarettes), it said.

Non-Domestic Illicit cigarettes (counterfeit /contraband/smuggling): These illicit cigarettes are commonly illegally imported through the porous borders of Pakistan with Afghanistan. In Pakistan, the presence of counterfeit cigarettes is not deemed material, as opposed to contraband/smuggled cigarettes.

The various studies conducted by Nielsen, ITIC/Oxford Economics and Euro monitor indicate that locally manufactured cigarette evading taxes account for 80 to 85 percent of the total illicit consumption volume, or approximately 20 billion cigarettes in Pakistan. Aside from BAT’s and PMI’s local affiliates, there are more than 21 registered companies in Pakistan but the bulk of the domestic illicit volume comes from certain companies.

PMI said that the local manufacturers are mostly based in the Mardan area (Khyber Pakhtunkhawa province) some also have operations in the territory of Azad Jammu & Kashmir.

Based on the information available with Nielsen, Oxford Economics and Euro Monitor; the second component of the illicit cigarette consumption (smuggled cigarettes) accounts for approximately 15-20 percent of the total illicit volume of approximately 20 billion cigarettes in Pakistan. As indicated in the Retail Trade Audit and the Empty Pack Survey, the main Non-Domestic Illicit brand is a trademark. Based on Nielsen retail audit, Pine is 40 percent (759 million cigarettes) of the total smuggled component of illicit in Pakistan.

Reportedly, a common route to smuggle all sorts of illicit goods into Pakistan is via the port of Bander Abbas in Iran, followed by road transit towards Afghanistan from where a wide variety of illicit goods are then smuggled into Pakistan via the two main border-crossing points of Torkham and Chaman. A popular illicit brand appears to be smuggled via this route too. The illicit cigarettes are fairly ‘openly’ transported across the country, illustrating lack of enforcement and deterrence, Phillip Morris added.

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