Philip Morris says tax hikes to benefit illicit tobacco sector in Pakistan

Philip Morris says tax hikes to benefit illicit tobacco sector in Pakistan

KARACHI: Philip Morris (Pakistan) has said that significant tax hikes on cigarettes would only benefit illicit tobacco sector.

The company in its annual report released on Thursday stated that turbulent economic situation coupled with the import restrictions, rupee devaluation, and rising cost of business has negatively impacted the investors’ confidence.

“Further, the recent increase in Federal Excise Duty (FED) by over 150% and the resultant widening of the price gap between the illicit non-tax paid and tax-paid cigarettes creates a challenging environment for the tax-paid tobacco industry.”

The unexpected and unprecedented tax hike for the tax-paying tobacco companies will effectively favor the already vast illicit non-tax-paying tobacco manufacturers in Pakistan.

This is expected to lead to shortfalls in government revenue as more adult smokers may shift from the tax-paid sector to the non-tax-paid sector.

Despite the aforementioned challenges, the management of the company continues to be committed to improving the overall financial performance of the company by utilizing global resources, pursuing strategic commercial activities, and bringing continuous improvements in product quality, process, and operational efficiency.

Growing the gross margin and controlling the cost base were the key objectives for managing the Company’s profitability in a continuously challenging environment.

The company will also continue to support government policies and actions to address the menace of non-tax-paid illicit tobacco trace including enhanced enforcement through the Inland Revenue Force of the Federal Board of Revenue (FBR).

The company stated that the Track & Trace System for tobacco was implemented effective July 01, 2022. However, to date, only three companies including Philip Morris (Pakistan) Limited (the Company), Pakistan Tobacco Company, and Khyber Tobacco Company have fully implemented the System whereas, the remaining tobacco manufacturers are still operating without the implementation of the System rendering the System ineffective until all tobacco manufacturers implement the System.

“The illicit non-tax paid sector causes an estimated annual loss of more than PKR 80 billion to the National Exchequer.”

During the period 2019-2021, the increase in the Federal Excise Duty (FED) on cigarettes was to the tune of 26%. In the current fiscal year 2022-23, the FED on cigarettes was already increased by 25%, however, the latest budget announcement in February 2023, increases the FED on cigarettes by more than 150% (cumulative increase in the current fiscal year of >200%) resulting in a price impact of more than ~250% for adult consumers versus Q1, 2022.

The minimum price prescribed under the tax laws for the levy and collection of FED and Sales Tax has also now been increased from PKR 70.1 to PKR 127.4 per pack.

This unexpected and unprecedented increase in excise is likely to provide an opportunity for illicit non-tax-paying tobacco manufacturers to expand their businesses and grow further at the expense of the compliant tax-paid tobacco industry.

The non-tax-paid illicit tobacco sector prior to this excise increase was estimated at 38% , however, with the recent excise increase, it is expected that the price gap between non-tax-paid and tax-paid cigarettes is likely to exponentially increase which may result in a shortfall of the additional revenue targets set by the Government from the tobacco industry as more adult smokers may shift to cheaper non-tax paid cigarettes.

Based on the market observation, it is noted that illicit non-tax-paid cigarettes are being sold at an average price of PKR 100 per pack which is way below the legal minimum price as mentioned above. For reference, the excise on value-tier brands alone is PKR 101 per pack.

In August 2022, while announcing the mini-budget, the Government targeted to generate PKR 200 billion in taxes from the tobacco industry during the fiscal year 2022-2023. In February 2023, a supplemental budget announcement targeted a further PKR 170 billion revenue out of which PKR 115 billion was allocated to be generated from the tobacco industry.

However, this is only possible if the Government takes immediate and effective enforcement measures against the non-tax-paid illicit tobacco sector. In absence of any effective measures against the non-tax-paid sector, the government may not be able to meet the revenue targets.

The estimated annual loss of more than PKR 80 billion to the National Exchequer caused by the non-tax-paid illicit tobacco sector is expected to increase exponentially in the absence of continued enforcement measures against the non-tax-paid illicit tobacco sector.

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