The recent rise in Federal Excise Duty (FED) on the tobacco sector will reduce government revenue and increase the share of contraband smokes in the domestic market.
According to industry insiders, there is a 50% drop in legal cigarette sales because the abrupt hike in FED will raise the price of legal cigarettes by 100%. The new FED rise will only favour illegal cigarette brands, who are boosting their margins and market penetration. They anticipate that the recent increase in the price will cause legal cigarette sales in Pakistan to fall from 60% to less than 50%, and that cheap illegal cigarettes will fill the hole, deterring investment in the legal industry.
According to industry sources, the government had set a target of collecting Rs 200 billion in taxes from the cigarette industry this fiscal year (FY23), but the unusual increase in the FED will not only dent the government collection targets, but will also have a negative impact on the legal cigarette industry, forcing them to close their doors.
“Despite the prevalence of illegal cigarettes in the country, the exceptional spike in FED has generated new concerns regarding the government’s revenue targets of Rs 170 billion in additional revenue,” they said.
Cigarettes are the sector in Pakistan with the highest rate of tax evasion, and the enormous increase in federal excise duty will exacerbate this tendency, they added.