High taxation impacts the tobacco sector

Pakistan’s legal tobacco sector is in dire need of help as high tobacco product tariffs have resulted in sharp declines in output and huge tax losses.

The Pakistan Bureau of Statistics reports that the growing price differential between legal and illegal cigarettes, mainly as a result of higher excise duty, has caused a 40% decline in the manufacture of legal cigarettes in just five months. In the current fiscal year, the legal cigarette business saw a production reduction of 39.31% between July and November. This is four times greater than the average decline in comparable large-scale manufacturing industries.

Large-scale manufacturing production fell by 0.80% on average over the same time period, with a negative 10.3% in the last quarter of the previous fiscal year. Between July and November of 2023, the tobacco industry’s overall production fell by 39.31%, while tax-paying tobacco companies had a 28.4% drop in production over the course of the previous fiscal year.

Additionally, there was a significant decline in the average monthly production of legal cigarettes, which fell from 4.41 billion in the first nine months of 2022 to 2.836 billion in the same period of 2023.

A primary cause of the economic downturn is the tobacco industry’s poor application of the Track & Trace system, which has cost the industry an astounding Rs. 310 billion. The government and authorities appear reluctant to move decisively against illicit cigarette makers in spite of this substantial loss of revenue.

According to Syed Saifullah Kazmi, Head of Investment Banking at Intermarket Securities, “the legal tobacco companies contributed Rs241 billion in taxes during the current financial year.” But he also pointed out that illegal cigarette makers had evaded taxes to the tune of Rs310 billion, a significant loss that could have been used to boost 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.