How illicit cigarette trade dents the socio-economic fabric

Effect goes beyond the industry itself and is more than just financial in nature.

KARACHI:

Illicit cigarette trade and the illegal activities it promotes – including domestic tax evasion, counterfeiting and cross-border smuggling – present a complex problem for the government and the legitimate industry.

According to Euromonitor estimates, in 2010 the Pakistani exchequer suffered a loss of Rs17.6 billion in tax revenue. In 2011, this national revenue loss due to illicit cigarette trade is estimated to have reached Rs18.5 billion (an increase of 5%).

Legitimate cigarettes are an important source of revenue for government. Illicit trade is hence a major cause for public concern. It deprives the government of its due revenue and also creates an un-level playing field for legitimate industry players. Left unchecked, by the year 2015 illicit cigarette trade is expected to reach 27.1 billion sticks with corresponding government revenue loss to the tune of Rs21 billion.

The total government revenue loss over the past five years due to illicit trade amounted to a staggering Rs80 billion. This is approximately equivalent to 11% of funds approved by federal government for Public Sector Development Programme (2011-2012).



Public health agenda undermined

Public health objectives continue to be undermined by illicit cigarette trade due to its low price, wide availability, and easy accessibility. Most illicit cigarette packets do not adhere to public health regulations that require printing of pictorial health warnings on all cigarette packets.

Another worrying implication is that lower-priced illicit cigarettes may encourage and lure the curious youth of Pakistan towards taking their first puff of smoke. It is reasonable to assume that a consumer starting on and getting accustomed to cheap, illicit cigarettes would not easily agree to pay twice the price for legitimate ones.

The manufacturers evading taxes and duties do not comply with minimum quality standards and their finished products may contain dangerous substances.

In a study conducted by Centre for Regulatory Effectiveness in Washington, counterfeit cigarettes were found to contain excessively high levels of toxic metals, tar, nicotine and carbon monoxide as compared to genuine cigarettes. Miscellaneous contaminants such as “rat droppings, camel dung, sawdust and tobacco beetles” as well as “sand and other packaging materials such as bits of plastic” were also detected in such counterfeit cigarettes. Thus illicit cigarettes undermine public health agenda in multiple ways.



Red flag for foreign direct investment

The climate for Foreign Direct Investment (FDI) in a country is determined by interplay of various factors. It goes without saying that governance is one of the most important determinants of investor’s confidence. Effective governance is crucial for gaining investors’ trust as they require assurance from government that their investments will remain safe. Investors also seek to be protected from unfair competition posed, for example, by non-compliant businesses.

The growing illicit cigarette market in Pakistan is a threat to global investor confidence. It exhibits the government’s inability to uphold a crime-free business environment. In 2011, the US placed Pakistan alongside 11 other countries on its Priority Watch List with regards to breach of Intellectual Property Rights (IPR). Such a move dents Pakistan’s reputation and hence undermines its ability to attract FDI.

The adverse impact of illicit cigarette trade is thus not confined to tobacco industry alone, but has far-reaching negative bearing on the entire economy and image of the country.

Supports organised crime

Illicit cigarette trade is fast gaining a reputation for being a low-risk and high reward business, enticing more “perpetrators-to-be” to its growing folds.

Due to its high profit margins it is also considered in many parts of the world to be one of the major sources of funding for other criminal activities. Proceeds from illicit cigarette trade are typically used by organised criminal syndicates to fund other unlawful activities.

The growing menace of the illegal cigarette trade

In 2011,  the illicit cigarette trade in the country reached a peak of 23.5 billion sticks. These local duty-not-paid (DNP), smuggled as well as the counterfeit cigarettes represented 26.7% of Pakistan’s total cigarette consumption in terms of volume, according to a recent report released by An international monitory agency, Euromonitor.

Last year, Pakistan ranked 3rd highest in illicit trade in Asia-Pacific countries, behind Malaysia and Hong Kong.

Over the course of 2007-2011, the local black market in cigarettes has successfully robbed a hefty Rs80 billion in tax revenues from the national exchequer.

Pakistan’s huge illicit cigarette trade is fuelled by two key components, high-tax incidence coupled with weak enforcement of trade laws. While laws and regulations aimed at controlling – if not eliminating – illicit cigarette trade are in place, it would seem that these are, at best, loosely enforced.

Especially crippling is the lacking sense of criminality associated with the illicit trade. This is highlighted by the fact that according to Euromonitor 84.5% of all illicit cigarettes comprise local DNP cigarettes, implying that the entire supply chain of this segment is cultivated on home ground.

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Published in The Express Tribune, September 2^nd, 2013.

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