Revenues to dip as illicit cigarette trade rises in Pakistan

Officials fear tax evasion from illegal trade to reach Rs77b

LAHORE: Officials of British American Tobacco have warned that government revenues can dip further at the end of current fiscal year as tax evasion due to illicit cigarette trade is likely to reach the Rs77-billion mark.

Referring to a recent report issued by Oxford Economics for British American Tobacco on sale of illicit cigarettes in Pakistan, Pakistan Tobacco Company (PTC) officials, at a webinar on Tuesday, said it was becoming increasingly difficult for them to run business affairs in Pakistan due to a sudden rise in the share of illicit cigarettes.

“The increase was alarming in fiscal year 2018-19. The share of illicit cigarettes in Pakistan reached 37.6% as of March 2020, which was 33% in June last year and 23.5% in 2014,” said British American Tobacco Head of Corporate Affairs for Middle East and South Asia Region Madeeh Pasha.

At this rapid pace, the illicit trade was becoming a risk for both - taxpaying companies and government revenues - as the increasing price gap was becoming an issue for the companies and decreasing tax revenues for the government, he added. As per the report, the tax evasion of Rs77.3 billion was more than three times the federal government spending on healthcare in fiscal year 2018-19.

The excise duty and sales tax levied on cigarettes represent an important source of revenue for the government. The federal excise duty and sales tax on cigarettes generated Rs123.9 billion in government revenues in 2018-19 alone.

But while these revenues are significant, the government is missing out on a further substantial sum. Pasha said this year the government was likely to lose Rs6-7 billion in tax collection from the tobacco sector. “These are crucial times in terms of tax collection due to Covid-19, however, the collection is likely to stand around Rs116 billion for fiscal year 2019-20 against Rs123.9 billion from the tobacco sector in the previous year, only due to increase in the share of illicit cigarettes.”

A substantial increase in excise duty rates have been witnessed in recent years, with the duty levied on the lowest-priced cigarettes increasing by 93% in the period between September 2018 and June 2019.

These increases, coupled with government’s removal of the third excise duty band, appear to have undone the progress, and the market share of illicit cigarettes has once again increased.

“Consumers buy illegal cigarettes because, by evading both excise and sales taxes, they are much more affordable than legal, tax-paid alternatives. By evading these levies, the illicit trade is depriving Pakistani government of the much-needed revenue,” said PTC Senior Regulatory Affairs Manager Noor Aftab.

A declining legitimate market detrimentally affects the commercial viability of legal cigarette manufacturing operations in the country.

Published in The Express Tribune, May 20^th, 2020.

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