Karachi, May 26, 2024 – The Overseas Investors Chamber of Commerce and Industry (OICCI) has advised Pakistan to avoid further increases in taxes on cigarettes.
In its proposals for the Budget 2024-25, the OICCI, which represents foreign and multinational companies operating in Pakistan, highlighted that the illicit cigarette trade causes an annual loss of over Rs 300 billion to the national exchequer. The primary driver of this illicit trade is the significant excise-driven price gap between tax-paid and tax-evaded cigarettes.
The OICCI pointed out that the unprecedented excise hike in February 2023 further widened the price gap between tax-paid and tax-evaded cigarettes, resulting in a substantial shift from tax-paid volumes to tax-evaded brands. “Curtail further excise increases to reduce or maintain the price gaps between legal and illicit products. This will likely shift adult consumption from illicit to legal products, leading to an increase in government tobacco revenue,” the OICCI suggested. The chamber noted that similar trends were observed during fiscal years 2020-21 and 2021-22 when a tax freeze was implemented.
This approach, according to the OICCI, would provide a level playing field for legitimate players and subsequently increase cigarette excise revenue. The chamber also highlighted that the manufacture of illicit cigarettes in non-tariff areas, especially in Azad Jammu and Kashmir (AJ&K), remains a significant challenge. Constitutional ambiguities and inconsistent legislation regarding the status of AJ&K and the tax treatment of goods moving between territories have allowed a large volume of non-tax paid cigarettes to enter Pakistan.
To address this issue, the OICCI proposed the early implementation of SRO 96(I) issued in 2021, which aims to curtail supplies of taxable goods brought from tax-exempt areas into taxable regions. The illicit operators exploit this legal loophole, and many registered cigarette manufacturers in Pakistan have production facilities in AJ&K.
Furthermore, amendments made in 2020 that prohibited the custom clearance of cigarettes not complying with local packaging and labelling requirements must be enforced rigorously to ensure compliance. The market is flooded with several genuine non-domestic brands (imported) without graphical health warnings. According to Oxford Economics 2022, 10% of illicit consumption comes from smuggled brands widely available at different price points.
The Track and Trace (T&T) System, a significant initiative supported by the IMF, aims to improve the collection of sales tax and digitization in major economic sectors, including tobacco. However, since its implementation in July 2022, the system has not yet produced credible outcomes, as many local players are under a stay order against it. Currently, it is mainly implemented by two multinational companies that already contribute 98% of total tobacco taxation. The OICCI emphasized the need to ensure that the T&T system is implemented across the board and supported by continuous and sustainable enforcement.
“The T&T system was introduced to control the illicit cigarette trade. However, only two multinational companies have implemented the solution, thereby increasing their operational costs, while companies evading taxes have refused to implement T&T,” the OICCI stated.
By addressing these issues, the OICCI believes that Pakistan can significantly reduce the illicit cigarette trade, thereby increasing government revenue and creating a fair competitive environment for legitimate businesses.
