Pakistan’s increased tobacco excise tax is backfiring massively.
Pakistan Tobacco Company (PTC) warned that the country’s illicit tobacco market has outgrown the legitimate one after the revision of the federal excise tax on tobacco products earlier this year increased the tax by more than 200%. PCT said the sale of illicit cigarettes counts for more than 63% of total volumes.
For the first time in history, the total government revenue received from the legal sector in FY24 would be surpassed by the potential loss of revenue resulting from the illicit sector.
Qasim Tariq, PTC’s senior business development manager, said, “The loss of potential government tax revenue to the black economy is estimated to be more than US$1 billion or more than PKR300 billion,” said.
The total volume of the tobacco industry is anticipated to be 81 billion sticks, of which 51.4 billion sticks are likely to be illicit, while the remaining 29.4 billion sticks will be produced by tax-paying tobacco manufacturers. In the ongoing fiscal year alone, the volume is projected to drop by 11 billion cigarettes from 42.4 billion to 29.6 billion as a result of consumers' preference for tax-evaded, smuggled cigarettes.
Month-by-month shipment data from PCT for FY21/22 showed that volumes in the legitimate sector dropped by more than 55% from January to June this year.
In response to recent media reports suggesting an increase in government revenue collections from the tobacco industry, Tariq stated that it was important to take the on-ground situation into account to develop a comprehensive strategy to combat this threat. Without enforcement, revenue generated from the legitimate tobacco industry would only be temporarily sustained because a rise in taxes would endanger the viability of any remaining businesses.
Increasing tax rates on cigarettes has no impact on illicit sector which is not a part of the tax system to begin with”, he added.