Enforcement Key for Efficient Tax System as Government Revenue Losses Increase

Since the revision of Federal Excise Duty (FED) tobacco products with an increase of more than 200% in FY 22/23, the tobacco sector has swelled to more than 63% of the total volume of cigarettes, resulting in the illicit sector outgrowing the legitimate sector, revealed the data shared by Pakistan Tobacco Company Limited (PTC)’s representatives Thursday in a media interaction.

Government led national anti-illicit tobacco strategy and revitalizing the dedicated enforcement task force could help reduce illegal trade in tobacco sector and help grow government revenues, PTC representatives stressed.

For the first time in Pakistan’s history, the potential government revenue loss due to the illicit sector would surpass the total revenue to be collected from the legitimate industry in FY23/24. The loss of potential government tax revenue to the black economy is estimated to be more than USD 1 billion, or more than 300 billion rupees, Qasim Tariq, the Senior Business Development Manager for PTC said while sharing the data.

It is expected that a volume of more than 11 billion cigarettes would be lost by the legitimate tobacco sector due to downtrading by consumers to tax-evaded and smuggled cigarettes.

PTC representatives showcased month-by-month shipment data since FY21/22. Volumes of the legitimate sector have reduced by more than 55% from January ’23 until June ’23, raising concerns about business sustainability.

Commenting on recent media reports suggesting a boost to government revenue collections from the tobacco industry, Tariq said that the on-ground situation needed to be factored in to develop a comprehensive policy to tackle this menace. Without any enforcement, revenue generation from the legitimate tobacco sector would only be short-lived, as an increase in excise would only put business sustainability at risk. “Increasing tax rates on cigarettes has no impact on the illicit sector, which is not a part of the tax system to begin with”, he added.

Referring to the proposals about increased excise rates on imported cigarettes, he said that would likely have no impact as all foreign cigarette brands were smuggled through illegal channels. Similarly, when there had been minimal to no adoption of the already established track and trace system, rolling out an effective digitised stamp system would also likely meet the same fate.

Tariq highlighted that the key to reigning in the menace of illicit trade rested on a healthy mix of appropriate fiscal measures and effective and across-the-board enforcement.