ISLAMABAD: The illicit cigarette trade in Pakistan caused an estimated revenue loss of 77.8 billion rupees in 2021, representing a market share of 38%.
According to a report compiled by Oxford Economics and launched here on Tuesday, the sustainability of the legitimate cigarette industry and the large tax revenues that Pakistan Tobacco Company (PTC) supports are threatened by the large illicit market which accounted for 38% of cigarettes consumed. in Pakistan in calendar year 2021, with more than 200 brands of illicit cigarettes sold below the mandatory minimum price. As a result, about Rs 77.8 billion in taxes were evaded in 2021.
The report estimates that PTC’s traditional cigarette business and its value chain made a total contribution to Pakistan’s GDP worth Rs 123 billion in 2021.
The increase in market share of illicit cigarettes in recent years has coincided with a sharp increase in excise rates. Excise rates on most legal cigarettes have almost doubled. With the Supplementary Budget of September 2018 followed by another Federal Budget of June 2019, Tier 2 excise rates, which account for 92% of the industry’s total volume, fell from Rs 854 per thousand to Rs 1,650 for a thousand.
The continued use of illicit cigarettes has a negative impact on government revenue. Despite rising excise rates, government revenue from legitimate cigarette taxation is estimated to have fallen to Rs 117 billion in 2019-20, 6% lower than the previous year.
Due to income instability and the growing illicit share, excise rates have not been changed in 2020-21. There was therefore no change in the price differential between unpaid (illicit) brands and legitimate brands, as had happened during the recent increases. Government revenue from legitimate cigarette sales increased by 14% to Rs 134 billion in 2020-21.
By avoiding both excise and sales taxes, illicit cigarettes are more affordable than paid legal alternatives.
Therefore, this consumption would shift to the cheaper legal premium alternative, while the remaining 90% of illicit consumption would shift to the cheaper legal alternative. This is, however, a simplifying assumption, as consumers of high-end illicit products may react differently (for example by retracting to other legal categories), the report adds.
Copyright Business Recorder, 2022