Around 40% of cigarettes sold unlawfully in Pakistan

KARACHI: The quantum of illicit cigarette trade in Pakistan is around 37 to 40 per cent of the 80 billion sticks, larger than the total consumption in many countries, said Muhammad Zeeshan, executive director and chief financial officer of Philip Morris (Pakistan) Limited.

With this huge volume of trade, the country has become the largest market of illicit cigarettes in Asia. However, Pakistan can benefit from the trade through implementing uniform laws, he said.

In the absence of the uniform regulations, there is no level-playing field for the genuine businesses, he said, adding that it erodes the investors’ confidence and discourages foreign direct investment, which has been an ongoing challenge for the country, he added.

According to Zeeshan, as the laws are not being properly enforced, the locally-manufactured cigarette brands are indulged in tax evasion and selling their produce at Rs63/pack, a price much lower than the minimum price prescribed under the tax laws.

In addition, these cigarette manufacturers continue to disregard the tobacco control laws such as underage sales, advertisements at retail sales and offering incentives to the public, he said, adding that a uniform law will help stop these violations and the government will earn more revenue.

Additionally, this will also ensure a level-playing field for all the players in the tobacco sector, which will raise investors’ confidence and encourage local and foreign investments.

Prime Minister Imran Khan has quoted at several fora that only two tobacco companies, constituting 60 per cent of the market share, are paying 98 per cent of the total taxes, while the remaining companies, producing 40 per cent cigarettes in the country, are contributing a just 2 per cent in tax revenues to the national exchequer.

To get further insight and solutions, BOL News talked to Muhammad Zeeshan on the issue.

What are the major problems being faced by the cigarette industry?

The biggest challenge being faced by Pakistan’s tax-paying cigarette industry is the lack of a level-playing field under which there are two concerns: tax evasion and violations under the tobacco control laws.

Why aren’t cigarette sales declining despite an increase in the tax rate?

The core issue is to understand the implications of excise duty on cigarette consumption. It is an established principle endorsed by the International Monetary Fund and the World Bank that an increase in taxes will create an incentive for illicit trade, which has to be countered with effective enforcement.

To elaborate, increasing taxes, without having a proper enforcement mechanism in place will not impact the consumption but will only change the consumption patterns where people will switch from tax-paid to non-tax-paid products. The same is the issue with the cigarette industry in Pakistan.

Enforcement has been an ongoing challenge and a regular increase in cigarette taxes have shifted the consumption from tax paid to non-tax paid cigarettes. Over the years, barring the last two years of no change in excise duty, with every excise increase tax paid cigarette volumes have decreased, whereas there has been a negligible impact on the overall consumption. Thus, it will be fair to suggest that excise increases without proper enforcement has negatively impacted the governments’ revenue and public health objectives.

Excise driven price increase of tax paid cigarettes widens the price gap between tax-paid and non-tax-paid cigarettes and in our view has been a primary driver of an increase in the sales of non-tax-paid cigarettes.

To what extent can the track and trace system be useful in documenting the cigarette industry?

There are primarily two types of illicit cigarettes sold in Pakistan today. One is a smuggled cigarette pack that does not have the government-mandated pictorial health warnings and other markings. However, the incidence of smuggled cigarettes in Pakistan is relatively low. The major issue is the availability of low priced locally-manufactured tax evaded cigarette packs. Currently, it is very difficult to distinguish between a tax-paid and a non-tax-paid cigarette pack. The introduction of a physical tax stamp will resolve this particular issue if implementation is followed by effective enforcement at all levels.

The track and trace system, a commendable effort, recently launched by the Federal Board of Revenue (FBR), can be a very effective tool to counter illicit cigarettes. However, what is very important to understand is that the track and trace system is merely a tool to facilitate enforcement and without enforcement, it is bound to fail, as it has failed in a number of other countries such as Malaysia where illicit cigarette incidence is in excess of 60 per cent, despite having a track and trace system.

A robust enforcement mechanism has to be in place for the success of the track and trace system without which it will just be an additional cost with no benefit for the industry or the government. This is one of the landmark achievements by the government, which we are excited about and will take every step to assist the government, make track and trace a success.

How can the illicit non-tax paid tobacco trade be reduced?

The track and trace system, one of the landmark achievements of the FBR, can be a very effective tool to counter illicit cigarettes. However, the system will only facilitate enforcement and without enforcement, the entire initiative will collapse. Through effective enforcement of tax and tobacco control laws, we believe that the track and trace system is a very positive development, provided the FBR ensures an across-the-board implementation, including in AJ&K.

Should the government and policymakers rely only on tax measures to protect public health?

As a general principle of price elasticity, increasing prices (excise driven) has the potential to reduce consumption. However, increasing taxes can have unintended consequences, as is the case of Pakistan where with every increase in excise duty it has been witnessed that the sale of non-tax paid cigarettes rises. As a company, we support the governments’ public health objectives. However, it is a must to ensure that there is a level-playing field and that all cigarette manufacturers pay the due tax on cigarettes and also follow all tobacco control laws.

In short, a level-playing field and enforcement of tax and tobacco control laws will help the government achieve its revenue and public health objectives. Tobacco harm reduction is also a very important aspect that the government should look into as an important pillar to achieve public health objectives. It is a concept that has been adopted by a number of developed countries where they are promoting the switch from combustible cigarettes to non-combustible alternatives. A primary and leading example is the Stoptober drive-by Public Health England.

What are the key sustainability initiatives of Philip Morris for harm reduction?

Philip Morris (Pakistan) Limited is a socially responsible organisation with a keen sense of sustainable development in the communities we work in. Our key focus is on environment protection and community uplifting efforts. We have launched #MissionCleanerPakistan across all major cities of the country and carried out anti-littering drives, awareness sessions and placing waste disposal bins across major cities in all the four provinces through 20 drives.

All the collected waste was recycled in a sustainable manner through our recycling partners and communities. We engaged more than 2,400 volunteers and collected more than 4,000kg of trash across Pakistan. Philip Morris is striving to reduce its carbon footprint by transforming its operations. Among other initiatives, it has converted the boiler fuel at its Green Leaf Threshing Plant from furnace oil to liquefied petroleum gas, which alone is expected to reduce the CO2 emissions by a staggering 30 per cent. This translates into a reduction of 2,200 tonnes of carbon emissions in the next five years.

Similarly, there are numerous initiatives to support farmers’ and communities. Our crop diversification programme is enhancing the economic and financial resilience of tobacco farmers by increasing their “Living income” through the cultivation of alternative and non-traditional crops.

Philip Morris is focusing on mechanising multiple activities through provision of ‘subsidised’ machinery to its contracted farmers. It has provided Re-Ridgers and Transplanters, which are gaining popularity among the farmers. Another major initiative is the provision of “Tobacco stringing machines’’, which are not only cost-effective but also designed to keep children away from the laborious task of stringing tobacco leaves together before their curing process.

As part of our aim to foster innovation and promote social entrepreneurship, the company in partnership with the local non-governmental organisations (NGOs) launched a programme to support and fund startups. So far, 150 startups have been engaged across Pakistan and the top three finalists from the programme were awarded $10,000 each.