High taxes weigh on tobacco industry

Lead to 40% decline in production, ineffective T&T system results in losses of over Rs310b

LAHORE:

The legitimate tobacco industry in Pakistan faces a severe crisis, with heavy taxes on tobacco products leading to a significant decrease in production and substantial tax losses.

According to the Pakistan Bureau of Statistics, legal cigarette production has plummeted by 40% in just five months due to the widening price gap between legal and illegal cigarettes, primarily attributed to increased excise duty. Between July and November of the current fiscal year, the legal cigarette industry witnessed a staggering 39.31% decrease in production, a figure four times higher than the average decline in other large-scale manufacturing industries.

Overall, large-scale manufacturing output experienced an average decline of 0.80% during the same period, marking a negative 10.3% in the twelve months of the previous fiscal year. The production of the tobacco industry as a whole decreased by 39.31% from July to November 2023, with tax-paying tobacco companies recording a 28.4% decrease in production during the twelve months of the previous fiscal year.

The average monthly legal production of cigarettes also saw a substantial drop from 4.41 billion cigarettes in the first nine months of 2022 to 2.836 billion cigarettes in the same period of 2023.

One major contributing factor to the economic setback is the ineffective implementation of the Track & Trace system within the tobacco sector, resulting in a staggering loss of over Rs310 billion. Despite this significant revenue loss, the government and authorities seem hesitant to take decisive action against illicit cigarette manufacturers.

Read Strict T&T system a must: tobacco industry

Head of Investment Banking at Intermarket Securities, Syed Saifullah Kazmi, stated that “The legal tobacco companies contributed Rs241 billion in taxes during the current financial year.” However, he noted a massive loss of Rs310 billion due to tax evasion by illicit cigarette manufacturers, underscoring that this revenue could have been utilised for the betterment of the economy.

Kazmi suggests the implementation and enforcement of the Track & Trace system, targeted enforcement against illicit trade across the value chain with a focus on the retail level, and the implementation of fiscal measures as crucial steps to control illicit trade in the tobacco industry. These proposed changes aim to not only curb tax evasion but also contribute to the economic growth of the country.

Published in The Express Tribune, February 13^th, 2024.

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