Tax revenue from cigarettes to decrease Rs34b

British American Tobacco (BAT) has urged the government to review its heavy taxes on smokeless products, including vapours, and to clamp down on the illicit trade of cigarettes that is expected to dent state revenue by Rs34 billion in this fiscal year.

A delegation of BAT and its affiliate Pakistan Tobacco Company (PTC) met Finance Minister Muhammad Aurangzeb this week, said company officials on Wednesday.

Last year, the government increased duties on vapours by 2,500%, which required at least 3,000% increase in prices to reach even breakeven point, said Asad Shah, a PTC executive. He said PTC had to withdraw from the market after the imposition of heavy duties and this allowed smuggled vapours to take over.

PTC Managing Director Syed Ali Akbar said that the company raised the issue of heavy duties on smokeless products with the finance minister and he promised to look into it. The minister acknowledged the adverse implications of illicit cigarettes and agreed that there was a need to shift policies, said Shah.

BAT is working to promote vaping and oral products as well as oral nicotine pouches to shift away from cigarettes. By 2035, BAT would earn more than half of its revenues from smokeless products, said Kingsley Wheaton, the company’s Chief Corporate Officer. But he cautioned that the achievement of targets would hinge on policy support from governments and public health regulators.

The company earned 17.5% of total revenue from smokeless products last year. BAT is working to reduce the health impact of tobacco business by switching to smokeless products, which have lower risks.

However, the formal tobacco sector is suffering badly in Pakistan due to increase in duties and the fearless penetration of smuggled and local non-duty-paid cigarette brands. In the last budget, the government significantly increased taxes on tobacco, which instead of curbing smoking resulted in shifting smokers from tax-paid expensive brands to cheaper illicit brands. The share of illicit and untaxed cigarettes increased from 22% to 54%.

Total estimated annual sales of cigarettes are around 79 billion sticks and estimates suggest that 46 billion sticks are sold in Pakistan without paying taxes. The 200% excise shock in 2023 considerably shrank the formal sector and as a result government revenue and the share of formal sector would go down in the current year, said Asad Shah.

Last year, the government received Rs277 billion in revenue from regulated manufacturers, which was expected to decrease to Rs243 billion this year, he said. A revenue reduction of about Rs34 billion, or 12%, is projected. Likewise, the formal sector sold 36 billion sticks of cigarettes last year, which is projected to dip 8.3% to 33 billion sticks. He said that there was no reduction in the number of consumers, who shifted to cheaper smuggled brands.

Nearly 79 billion cigarettes were sold in Pakistan, of which 46 billion were in the informal sector, said Shah.

Even if there was no increase in excise duty in the next two years, the regulated sector’s share would further shrink to 30 billion cigarettes and the government revenue would dip to Rs223 billion, he added. “We were hopeful that the track and trace system might improve the situation but the silver bullet did not work,” said Shah. There was zero enforcement of the track and trace system at the point of sale and smuggled brands were openly sold even one kilometre away from the red zone, he added.

Kingsley Wheaton said that in Pakistan about 45% of the adult population was smoking, a ratio that was around 5% in Sweden after the introduction of smokeless products. He said that the formal tobacco sector paid $900 million in taxes to Pakistan’s government last year, which could be more than doubled by clamping down on the illicit trade of cigarettes.

BAT claims that the share of illicit cigarettes is 54% of the total consumption.

PTC on Wednesday launched its Omni platform in Pakistan to advance tobacco harm reduction campaigns. Omni is a pioneering global platform designed to drive awareness and informed discussions around tobacco harm reduction. This platform aligns with the BAT Group’s business goal to build a smokeless world through science-backed innovations.