Tax increase on cigarettes, one beneficiary, ILLICIT MARKET, says Philip Morris Pakistan CFO

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The documented tobacco sector in Pakistan is experiencing a significant decline in sales, resulting in a loss of billions of rupees to the national exchequer. Concurrently, the illegal cigarette market is witnessing a surge, causing severe damage to the government’s tax collection target for the fiscal year 2022-23 and undermining its policies aimed at reducing tobacco use.

Speaking to a group of journalists in Islamabad, Muhammad Zeeshan, Chief Financial Officer and Executive Director of Philip Morris (Pakistan) Limited, expressed concerns about the escalating illegal cigarette market and its implications for government revenue. “If the illegal cigarette market continues to rise as it did after the excise duty hike, the government will not be able to generate the anticipated revenue,” he said.

Zeeshan highlighted that the government had increased the Federal Excise Duty (FED) by 200% in the current fiscal year. As a consequence, Philip Morris (Pakistan), one of the two documented tobacco companies, experienced a staggering almost 70% decline in sales and a 65% decrease in production volume during the last two months, March and April 2023. This downward trend is expected to persist in the coming months due to the rise in illicit cigarettes.

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During the quarter ended March 31, 2023, the company made a significant financial contribution to the economy by paying PKR 5,990 million in excise duty, sales tax, and other government levies. However, this amount represents a decrease of 16.4% compared to the previous period. The decline can primarily be attributed to a decrease in sales volume due to a price increase enforced by excise regulations in February 2023.

He said that the unforeseen and unparalleled rise in excise taxes presents an opportunity for illegal tobacco manufacturers to expand their operations and gain ground, while compliant tax-paying tobacco companies suffer. As a consequence, the government’s revenue objectives from the tobacco industry are likely to be limited to below Rs 200 billion, while the target was set at Rs 260 billion after the FED hike in February.

It is pertinent to mention that the documented tobacco sector contributes a significant 98% of the total tax revenue from the tobacco industry, whereas illegal cigarette manufacturers only contribute a mere 2%.

Zeeshan emphasized the urgent need for the government to take decisive measures to combat the illegal cigarette market, which currently captures more than 40% of the total market share and is projected to escalate to 50%, making Pakistan one of the largest illicit cigarette markets in the world. Additionally, Premier Shahbaz Sharif himself acknowledged a Rs 100 billion loss due to tax evasion from illicit tobacco companies.

He added that the Euro Monitor, a research firm, also reports that Pakistan has almost 40% market share of illegal cigarettes in 2022, making Pakistan the biggest illicit cigarette market in South Asia.

Furthermore, he emphasized the importance of ensuring the installation of the government’s track & trace system in all cigarette manufacturing units. Currently, this system is implemented in only a few tobacco companies. He urged the government to expedite the installation process once the stay order on the track & trace system is lifted. The effective monitoring of these facilities is crucial to curbing illicit tobacco trade.

He also asked the government to reconsider the substantial hike in FED, as it not only hampers fiscal revenue and legal cigarette sales but also fuels the growth of the illegal cigarette market, exacerbating the government’s current financial challenges.

Zeeshan underscored the need for across-the-board implementation of laws regulating the tobacco industry and providing a level playing field for legal cigarette companies. These measures are essential to safeguard government revenue and protect the documented tobacco sector from further decline, he concluded.

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