Govt fails to stop illegal tobacco trade leakages despite IMF concerns

IMF has expressed serious concern over the tax evasion of 80 billion rupees from the illegal sale and purchase of cigarettes

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IMF Pakistan Illegal Tobacco Trade

Almost three weeks have passed since the International Monetary Fund (IMF) raised serious concerns about illicit tobacco trade which drains Rs 80 billion from the national budget.

However, It is regrettable that the government and the Federal Board of Revenue (FBR) have been unable to take concrete measures in order to stop leakages into the illicit sector.

According to the reports, The International Monetary Fund (IMF) has expressed serious concern over the tax evasion of 80 billion rupees from the illegal sale and purchase of cigarettes.

Relevant Read: Increased Taxation on tobacco will only harm government’s revenue collecting

In a recent meeting, the finance ministry and the FBR also briefed the prime minister on the illegal sale and purchase of cigarettes, and a monthly report on the action taken will also be presented to the prime minister.

Prime Minister Shahbaz Sharif directed that action be taken against illegal cigarette factories and that the FBR install track and trace systems at all cigarette factories as soon as possible.

It is worth mentioning that only three tobacco companies have installed track & trace system so far, while the other 50 companies are yet to install the system.

The Federal Board of Revenue’s Inland Revenue Intelligence teams will raid illegal cigarette factories, and a report on actions taken against illegal cigarettes will be sent to the IMF.

It is pertinent to mention that the federal government has imposed a mini-budget of Rs 170 billion to meet the IMF conditions and to reduce the fiscal deficit, in which up to 154% hike in Federal Excise Duty (FED) on cigarettes.

Documented tobacco sector has shown severe concerns on the decision. They argued that an increase in price gap will further strengthen illegal trade.

The Pakistan Tobacco Company and Philip Morris (Pakistan) Limited have conveyed their fears to the government that the tax revenues might witness a surge of only 10 percent. However, the massive hike in FED on tobacco will fetch Rs60 billion in additional revenues. This can only happen if the share of illicit cigarettes did not increase. If the share of illicit cigarettes went up, then all projections made by the FBR will dash to the ground.

The spokesperson of one of the legal tobacco companies Philip Morris (Pakistan) Limited said that The unprecedented tax hike for the tax-paying tobacco companies will effectively favor the already vast illicit cigarette manufacturers in Pakistan. This will also lead to significant shortfalls in Government revenue as the volumes will massively shift from the tax-paid sector to the non-tax-paid sector as often seen in the past.

During the period 2019-2021: the FED increase was to the tune of ~26%. During the current fiscal year 2022-23, FED on cigarettes was already increased by ~25%. The latest announcement increases FED on cigarettes by greater than 150% which will result in a price impact of more than ~250% for adult consumers versus Q1, 2022.’, he said.

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