Pakistan loses Rs24 billion a year due to illicit cigarette trade

Nielsen report says its share has grown 43.5% over last six years

Peer Muhammad May 04, 2016
Nielsen report says its share has grown 43.5% over last six years. PHOTO: REUTERS

ISLAMABAD: Illicit cigarette trade, having grown at a phenomenal 43.5% rate over the last six years, accounts for nearly a quarter of the gross trade of the product, causing an annual loss of Rs24 billion to the national exchequer.

This trend has pushed Pakistan to a not-so-coveted fourth position in Asia in terms of the share of illicit trade in the overall trade of the product.

Nielsen report: Illicit tobacco trade grows 43.5% in 6 years

This was revealed by a research report on illicit cigarette trade in Pakistan prepared by Nielsen, a global market research firm that documents consumer behaviour in over 100 countries.

According to the report, 23.7% of the total cigarettes’ trade in Pakistan was illicit and avoids the tax net. Out of this, local tax-evaded (LTE) cigarettes account for 17.3 billion cigarettes. This comes out to be 89% of the gross illegal cigarette trade. The remainder of the trade stems from smuggling. The report reveals that 2 billion cigarettes are smuggled into Pakistan annually, mainly from Afghanistan.

The report added that illicit trade in cigarettes, whether in the form of smuggling, local tax evasion, or counterfeit, was a global phenomenon, with one in every ten cigarettes and tobacco products reported to be illicit and in 2013, Pakistan ranked 4th in Asia on the basis of the illicit cigarette share in the total cigarette market in the country.

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During the last six years, the illicit segment has grown by 43% and the tax-paid cigarette volume has declined by 11%, and, on average, more than 1 billion illicit cigarettes are annually added to the illicit segment in Pakistan.

Due to vast difference in prices, more and more consumers are opting for illicit substitutes. The pricing and regulatory differential with neighbouring Afghanistan also plays a key role in the continued inflow of smuggled cigarette into Pakistan and high profit margin that retailers make by selling illicit products also drives the growth of such tax-evaded products.

The report highlights that manufacturing and distribution of LTE cigarette in Pakistan was not some covert operation, but rather an elaborate and well established supply chain was in place to ensure the availability of these products across the country.

The report notes that manufacturing a cigarette in itself was an elaborate process and marketing such a huge quantity of cigarette involves extensive operations.

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The under declaration of the raw materials, including tobacco crop, cigarette paper, and filter rods, helps under-state the volume of cigarette manufactured that ultimately assists in evasion of excise duty and sales tax on cigarettes.

Speaking on the occasion, Nielsen Pakistan Senior Manager Jawwad Riaz said the price differential between legal and tax-evaded cigarettes was the major challenge the government was facing.

He said that there are 13 agencies and 25 laws in place to curb this illicit trade, but records show that despite apparent deterrents, illicit trade was thriving.

Published in The Express Tribune, May 5th, 2016.

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Former tobacco company employee | 5 years ago | Reply This report is commissioned annually by Pakistan's largest tobacco company - actually owned by a foreign company. The purpose of the report is always the same - convince the government to reduce taxes so that tobacco companies can reduce prices, and compete with lower priced cigarettes smuggled or produced illegally in the country. It's all part of tobacco lobbying for lower taxes, or at least a reduction in an increase on taxes, timed in the lead up to the budget. The companies are currently negotiating with the FBR on tax rates and do this exercise every year.
Ishrat salim | 5 years ago | Reply Thanks to 6 years of civilian rule...
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