Massive Revenue Leakages Caused by Unlicensed Cigarette Brands Despite Crackdown Orders

Illegal Tobacco

Over 125 unlicensed and non-duty-paid cigarette brands continue to flood the market, leading to significant revenue leakages and undermining the government’s efforts to meet tax revenue targets. Industry insiders and sources within the Federal Board of Revenue (FBR) project that the government’s tax revenue from registered cigarette brands will fall short by at least Rs60 billion, bringing it below the targeted Rs240 billion for the current fiscal year.

Earlier this year, the government implemented an average 150% increase in federal excise duty (FED) with the aim of collecting Rs240 billion from the tobacco sector. However, due to the rise in illicit trade, the tax collection has not seen a substantial increase, as anticipated. The lack of a crackdown on unlicensed brands has resulted in a considerable revenue shortfall.

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According to Section 40E of the Sales Tax Act, manufacturers of specified goods are required to obtain brand licenses from the FBR for each brand or stock keeping unit (SKU). Failure to comply with this requirement deems the brand and stock counterfeit, subject to confiscation and destruction.

A recent survey conducted by Ipsos, a European surveyor, revealed that approximately 128 cigarette brands are being sold without the government’s track and trace stamps. Furthermore, these brands are not registered with the tax authorities under Section 40E. Out of the 10 surveyed districts in Pakistan, only 26 brands were found to bear the track and trace stamps, indicating a failure on the part of the FBR to enforce the track and trace system effectively.

The FBR’s limited capacity to combat the sale of smuggled brands in the market has been a primary concern. The survey highlighted that in rural areas, 41% of brands evade taxes, while 7% are smuggled.

Expressing grave concern over the increasing sales of smuggled and non-duty-paid cigarette brands, Prime Minister Shehbaz Sharif addressed the issue in a closed-door meeting. The premier issued a warning to the FBR management, stating that if the situation does not improve by July 15, serious action will be taken.

In an attempt to curb smoking trends, the government raised the FED on less expensive brands by Rs3,000 to Rs5,050 per 1,000 sticks and by Rs10,000 for expensive brands to Rs16,500, resulting in a 146% to 154% increase. However, this move inadvertently led to smokers shifting from legal to smuggled brands, rendering the desired outcome elusive.

Before the FED increase, Pakistan Tobacco Company’s (PTC) most popular brand held a 9% share in total sales value and a 32% share in total revenue generated from the tier-I category. However, following the shift in consumer preference, the brand’s share in value dropped to 6%, with revenue falling to 30%.

An official from Pakistan Tobacco suggests that reducing the tier-I FED by 30% to Rs11,550 and the tier-2 FED to approximately Rs4,000 would enable the industry to contribute Rs360 billion in revenue to the FBR in the next fiscal year.

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