Lahore - One out of every four cigarettes sold in Pakistan is illicit, and the trend is growing with the availability of deep discounted cigarettes posing serious challenges to the legal tobacco industry in Pakistan.

Nearly one billion cigarettes are added every year into the black market, reveals Nielsen report titled “The challenge of illicit trade in cigarettes: Impact and solutions for Pakistan.”

Excessive excise tax driven price increases over the years have resulted in a huge price gap between the tax paid and deep discounted cigarettes, creating a non-sustainable level playing field for the legal cigarette manufacturers.

The increase in this menace is credited to the free availability of locally manufactured deep discounted cigarettes in most markets of the country. On average packs of these locally manufactured deep discounted cigarette brands are available at the retail for Rs. 25 or below whereas, the minimum tax (excise + sales) that a manufacturer is required to pay to the government stands at Rs. 36.40 (excise tax Rs. 28.40 + sales tax Rs. 8).

Some manufacturers are printing “Retail Price Rs. 31.4 + Sales Rs. 5.33 on their packs and promoting sales to consumers at Rs. 10 per pack, creating massive discounted pricing in the market. Fair competition demands that all tobacco manufacturers should pay their fair share of taxes.

According to data, the price disparity between the legal and the deep discounted cigarettes have existed for the last few years. However, the situation has become even more critical after the December 2015 fresh measures to enhance tax collections. The average street price of the most popular tax-paid cigarettes have increased to Rs. 65 per pack while the deep discounted cigarette brands maintained their average street price at Rs. 25 per pack, which is a staggering 160 per cent lower than the legally compliant tax-paid cigarettes.

Moreover, due to the availability of these deep discounted cigarettes nationwide (as per Nielsen retail data these brands are available at 65% of the outlets nationwide) and at such low prices, it creates another major problem for the government’s efforts in improving the public health objective of preventing youth access to cheaper cigarettes. It is very critical that the Government introduces and strengthens measures to close the huge price gap to prevent leakage of government revenue and pursue public health objectives.

With the government pushing for more revenue collection, making every player in any industry pay due taxes should be the aim. Due to the current non-level playing field, the fully tax compliant industry has been on a declining trend since 2009 and the incidence of deep discounted cigarettes has increased by 43.5%during the last six years and is now at 28% of the total consumption (Figure 3). The share of fully tax paying tobacco industry in the market is continuing to erode at a faster pace. The long term sustainability of the legitimate tobacco Industry is may be at risk of jeopardizing government’s fiscal and public health objectives due to absence of level playing field. Strict enforcement of the various laws with deterrent punishments covering the entire supply chain from suppliers to retailers is required to address this huge problem.