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Enforcement Vital to Stabilize Tax System Amid Rising Revenue Losses

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The unprecedented surge of over 200% in Federal Excise Duty (FED) for tobacco products in FY 22/23 has resulted in the illicit tobacco sector booming to a staggering 63% of the total cigarette volume. Consequently, this illicit boom has now dwarfed the legitimate sector, as disclosed in the recent data shared by representatives from Pakistan Tobacco Company Limited (PTC).

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This burgeoning growth of the black-market sector threatens to inflict a severe blow to Pakistan’s fiscal health. Alarmingly, for the first time ever, the potential government revenue losses from this sector are predicted to surpass the total revenue anticipated from the legitimate industry in FY23/24. Qasim Tariq, Senior Business Development Manager for PTC, unveiled that the projected loss would exceed a whopping USD 1 Billion, or over 300 billion Rupees.

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Furthermore, due to a consumer shift towards tax-evaded and smuggled products, the legitimate tobacco sector stands to lose a volume of more than 11 Billion cigarettes.

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A concerning trajectory is evident from the PTC’s showcased shipment data: From January to June 2023, volumes of the legitimate sector plummeted by over 55%. This drastic decline rings alarm bells for the industry’s long-term viability.

Despite media reports painting a rosy picture of revenue collections from the tobacco industry, Tariq emphasized the grim reality on the ground. He expressed concerns that the mere hiking of tax rates on cigarettes would have negligible impact on the illicit sector, which remains outside the tax system’s purview.

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Addressing suggestions to raise excise rates on imported cigarettes, Tariq dismissed them as futile, pointing out the prevalent smuggling of foreign cigarette brands. Moreover, with the scant adoption of the pre-established track and trace system, he opined that a proposed digitized stamp system would likely be doomed to fail.

Ultimately, Tariq emphasized the need for a dual-pronged approach to counter this threat: harmonizing fiscal policies while ensuring rigorous enforcement. Only with these combined efforts can the illicit trade’s menace be effectively countered, safeguarding both government revenue and the legitimate tobacco industry’s future.

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