By News Desk
The illicit cigarette market has experienced a staggering surge in growth during the last fiscal year, raising concerns that it may soon surpass the legitimate industry in the current fiscal year of 2023-24.
This alarming development has caused distress within the legitimate industry, as failure to implement corrective measures by the government could lead to the industry’s potential closure.
Estimates from the industry indicate that the share of illicit cigarettes, which results in substantial losses to the national exchequer, may surpass the annualized contribution of the legitimate sector.
The projected share of illicit cigarettes is feared to reach Rs323 billion, posing a significant loss to government tax revenues.
In contrast, the contribution of the legitimate industry is estimated to stand at Rs243 billion in the current fiscal year of 2023-24.
In order to comprehend the reasons behind this worrisome situation, a thorough investigation is necessary.
Pakistan’s Large-Scale Manufacturing (LSM) sector witnessed a contraction of 25 percent in March 2023.
The legitimate tobacco sector experienced a staggering decline of 50 percent in growth. These significant setbacks in the formal sector raise questions regarding the underlying causes of this decline.
During the first nine months (July-March) of the current fiscal year, the LSM sector contracted by 8.1 percent, while the legitimate tobacco sector experienced a negative growth of 24 percent in the same period.
Recent retail audits reveal that the share of illicit cigarettes rose to 42.5 percent in April 2023, compared to 36 percent in January 2023. The increase in illicit cigarettes is primarily attributed to an unprecedented 200 percent hike in the Federal Excise Duty (FED) rate in the last fiscal year.
FED on legitimate cigarettes was raised three times: first during the budget for 2022-23, then in August 2022 through a mini-budget, and finally, the FBR raised FED by 154 percent, reaching an unprecedented level.
Consequently, the overall FED rate on cigarettes increased by 200 percent in fiscal 2022/23.
Such a massive increase in FED has resulted in a surge of illicit cigarettes, both from locally manufactured untaxed brands and an influx of smuggled brands entering the country primarily through porous borders.
According to the retail audit survey, the volume of smuggled cigarettes has increased by 67 percent since January 2023, rising from 369 million sticks to 616 million sticks in April 2023.
The volume of Duty Not Paid (DNP) cigarettes also witnessed an increase from 2.48 billion sticks in January 2023 to 3.3 billion sticks in April 2023, representing a 32.5 percent increase from January to April 2023.
The exorbitant excise increases in February 2023, coupled with inadequate enforcement, have amplified the sale of illicit cigarettes, including DNP and smuggled cigarettes.
In the previous fiscal year of 2022-23, the legitimate tobacco sector accounted for 41.4 billion sticks, while the illicit sector claimed 41.6 billion sticks.
However, following the recent irrational hike in FED on the tobacco industry, projections indicate that the share of the legitimate tobacco sector will shrink to 29.6 billion sticks in 2023-24, while the illicit cigarette share is expected to reach 53.4 billion sticks.
Consequently, a shift of 11.8 billion sticks is anticipated to move to the illicit cigarette market.
The time has come to rationalize FED rates imposed on the legitimate industry. Without fiscal intervention, the legitimate industry cannot sustain itself under the existing taxation scheme. Additionally, increased enforcement measures against illicit cigarettes are urgently needed to combat this issue.
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