FY23Q1 cigarette sales decline 50pc on massive hike in FED
After the massive increase in federal excise duty (FED), the sale of legal cigarettes has declined by 50 percent, while market share of illicit cigarette rose to 45 percent in the first quarter of this year.
Pakistan has become the second-largest country in Asia in terms of the sales of illicit cigarettes, following Malaysia. Malaysia currently holds a 50% market share of illegal cigarettes, while Pakistan’s share is 40%.
However, there are concerns that Pakistan may surpass Malaysia and become the leading country in Asia due to the recent increase in federal excise duty.
Federal excise duty has been increased thrice this fiscal year. It was increased by 25 percent in June and August and by 150 percent in February. With this increase, the excise duty on cigarettes has gone up to 200 percent.
Sales of illicit cigarettes spike after massive FED increase for the documented tobacco sector.
Considering the economic challenges, curbing illegal trade is inevitable. Illegal trade is not only denting the economy but also discouraging the documented sector.
The documented tobacco industry has demanded that the government should make efforts to provide an enabling environment for tax-paying organized industry.
Muhammad Zeeshan, Chief Financial Officer and Executive Director of Philip Morris (Pakistan) Limited, expressed these views at an informal meeting with journalists.
He said that we all are aware that Pakistan is going through the most difficult period economically and Philip Morris Pakistan stands with the people of Pakistan with its deep commitment and firm determination in these challenging situations.
“We are contributing to the strength of Pakistan by providing employment opportunities in Pakistan with our investment and contributing significantly in the form of revenue to the national exchequer”, he added.
In order to control the twin deficit faced by Pakistan, the government has imposed a ban on imports, which aims to reduce the pressure on foreign exchange reserves. On the other hand, to reduce the budget deficit, tax rates have been increased in the supplementary budget.
Additional taxes imposed on various products, including a significant increase in federal excise duty on cigarettes, are also part of these measures.
Cigarettes are among the sectors that are already highly taxed, and the recent increase in federal excise duty has widened the gap.
Zeeshan stated that in Pakistan, whenever the tax on legal cigarettes increases, the sale of illegal cigarettes also increases.
The impact of significant increase in excise duty has started to set in on the legal cigarette industry, and the government itself will face the negative impact of this move in the form of reduced tax revenue from cigarettes.
Zeeshan said that the statistics for the first quarter prove that the sale of legal cigarettes has declined by 50 percent, whereas, as in the past, the increase in excise duty benefiting illegal cigarettes.
He said that the market share of illegal cigarettes was between 35 and 38 percent before the excise hike but has now reached 45 percent in just a month. If the government does not take appropriate measures, the share may reach 50 percent.
He said that the legal industry has never opposed taxes or excise. However, such a high increase will not be in the interest of the legal industry and the government itself.
Zeeshan added that the recent exorbitant increase in excise duty has doubled the price difference between legal and illegal cigarettes. With the rapid increase in illegal sales, it is estimated that the government will not be able to achieve the tax collection target of Rs 260 billion from the tobacco industry.
The decrease in legal cigarette sales will result in a meagre collection of Rs 170 billion, a figure that the government can easily observe by analyzing the taxes collected in March.
Moreover, he said that the government is likely to miss the tax collection target by Rs 90 billion as a result of an abrupt increase in illicit tobacco sales following the increase in excise duty.
Muhammad Zeeshan said that without curbing the illegal cigarette trade, a significant increase in the federal excise duty rate will never be effective as the entire burden of taxes is being borne by the organized and legal cigarette industry, which already contributed around 98% of taxes collected from the tobacco industry.
He said that if illegal cigarettes are brought under the law, the government can cover the revenue deficit more easily.
For this purpose, cigarettes were brought under digital monitoring of the track and trace system. However, this system was implemented by only three companies out of around fifty companies in the country.
He urged the government to apply laws uniformly to the entire industry, implement track and trace across all companies, and provide a business environment in which an organized tax-paying industry can thrive.