Pakistan Tobacco Company (PTC) is moving towards shutting down its entire Jhelum factory, a step that it is compelled to take owing to a sharp fall in sales as illicit and smuggled cigarette brands flood the domestic market.

With the surge in tax rates for the legal industry, cigarette sales of PTC have dropped markedly, forcing the company to shut down eight out of 10 units at its Jhelum manufacturing plant.

Briefing media, PTC representatives shared that a steep decline in volumes of the legitimate industry and a significant rise in sales of illicit cigarettes were being witnessed.

The exorbitant federal excise duty (FED) rates announced in February 2023, coupled with the lack of enforcement measures, amplified sales of illicit cigarettes in the market, including the duty-not-paid and smuggled cigarettes, they said.

Recent data of the Pakistan Bureau of Statistics showed that production of the legitimate tobacco industry dived 50% in March, the first month of business after the exponential increase in FED. However, the overall large-scale manufacturing (LSM) industry saw half the decline registered by the tobacco industry, at 25%.

The same impact had been felt throughout the current fiscal year as during the period from July 2022 to March 2023, the legitimate tobacco industry suffered a huge production loss of 24%, three times the loss incurred by the entire LSM sector, PTC officials said.

In that situation, consumers were forced to shift from the legitimate cigarette brands to cheaper options such as the locally manufactured duty-not-paid cigarettes and the undocumented smuggled brands.

According to the company representatives, since January 2023, volumes of duty-not-paid cigarettes and smuggled cigarettes have shot up 32.5% and 67% respectively. This has resulted in the illicit sector’s share growing to over 42.5% of the total market.

In 2022-23, the share of legitimate tobacco sector was 41.4 billion sticks while the illicit sector sold 41.6 billion sticks. However, “after the recent irrational hike in FED, it is projected that the share of legitimate tobacco sector will contract to 29.6 billion sticks in 2023-24 while the illegal industry’s share will reach 53.4 billion sticks.” This means that 11.8 billion sticks will shift to the illicit sector.

Dispelling the impression created by the so-called NGOs that the illicit cigarette industry had only 9-18% share in the market, PTC officials argued that the figures given by such non-existent NGOs had no relevance.

All these figures were neither authentic nor backed by any actual market research, they countered.

PTC Senior Business Development Manager Qasim Tariq shared that because of more than 200% increase in FED in February 2023, it would be for the first time in Pakistan’s history that the tax loss caused by the illicit sector in a fiscal year would be more than the legitimate industry’s contribution to the national exchequer.

“If the current fiscal regime prevails, damage to the national exchequer as well as the legitimate industry will be immense and tough decisions will have to be taken,” he cautioned.

A key initiative to curb illicit trade is the implementation of track and trace system, however, despite multiple directives by the prime minister for across-the-board implementation, it remains a distant dream.

“Local manufacturers continue to flout rules and regulations with impunity. This is further fuelled by the advertising and promotion campaigns run by the illicit manufacturers, who offer cash prizes, giveaways and merchandise to consumers, which is prohibited,” he said.

“An aggressive and effective enforcement campaign must be undertaken to curb this menace.”

Tariq revealed that the company informed the FBR that it was exploring the option of exporting four of its machines in its manufacturing units owing to the loss of sales.

“Fiscal interventions and enforcement must go hand in hand to control the growing menace of the illicit sector.”

As per the latest industry standards, if all conditions remain the same, the illicit sector is feared to approximately double in comparison to the legitimate industry by next year.

Published in The Express Tribune, May 21st, 2023.

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