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Troubles of cigarette industry.

Troubles of Cigarette Industry

Cigarette industry contributes the major excise amount to the national exchequer. Excise duty collection from the cigarette industry is targeted at Rs. 8700 million. It accounts for nearly 35 per cent of the total excise collection of the Government and constitutes one of the most important heads of accounts in Government revenue collection.

Troubles for the cigarette industry started in mid-1988 with the decision to ban exports of Pakistani cigarettes to Afghanistan. This decision was prompted from the fact that Pakistani cigarettes destined for Afghanistan on excise free basis was returned back into the country despite Government efforts to change the packing colour scheme of the brands being exported. Premier Tobacco, Lakson Tobacco and Pakistan Tobacco had a major share in the Afghan market.

Pakistani cigarettes were being exported to Afghanistan since 1972. With the stoppage of exports from Pakistan, the Afghan market was virtually taken over by Japanese and European brands. After capturing the Afghan market these brands started overflowing into Pakistan. Now smuggled cigarettes are being openly sold from Peshawar to Karachi. Dunhill, Benson and Hedges, State Express (555), resulting in a dramatic drop in the sales of Pakistani brands.

The dumping factor into the Afghan market is clearly indicative from the fact that the top smuggled brands, especially from Japan, are priced lower in the local market than at the duty free shops at the international airports around the world. Besides eating into the top brand cigarette market of the country such as Gold Leaf and Rothmans middle category brands are also being affected and falling sales for brands such as Capstan, Red & White, Morvin Gold, Wills etc. are being witnessed.

To compound the woes of cigarette industry the Government also scapped the three tier excise collection formula and introduced a single slab for all cigarette manufactured irrespective of the price. Under the three tier formula brands priced above Rs. 1.75 for 10 cigarettes were paying excise duty at the rate of 75 per cent of retail price. For brands in the range 1.01 to Rs. 1.75 the rate was 64 per cent and for one rupee and below the rate was 55 per cent. In the budget for 1988-89 a single slab of 73 per cent of the duty rate per 1,000 cigarettes plus 12-1/2 per cent Sales Tax was introduced.

The single tier structure has resulted in the organised sector losing a volume of as such as 8 billion cigarettes to the unorganised sector. Four large and one small cigarette manufacturing units in the organised sector were closed down. And 12 medium and small units in the unorganised sector started operations in this period. Loss of Government revenue is estimated to be over Rs. 100 crore per annum and it continues to increase. It is projected to be Rs. 175 to Rs. 200 crore in the current fiscal year.

A ten year industrial volume scenario from 1980 to 1990 show below indicates clearly the volume of a staggering 7.33 billion cigarettes being shifted to the unorganized sector who do not pay excise duty.

PTC Proposal

Faced with the above scenario the market leader in the cigarette industry "Pakistan Tobacco Company" estimated to have a market share of over 52 per cent has reportedly proposed: (a) To counter the phenomenal increase in smuggling of British, American and Japanese brands, estimated at around 500 million cigarettes per annum and projected to increase to 840 million in the current year, would require relief to the top Pakistani brands by lowering the Government levy so the prices of brands such as Golf Leaf and Rothman could be made competitive with the competing smuggled brands; (b) In order to counter the unorganized sector and excise evasion, evident from selling certain brands selling below cost PTC has reportedly proposed that the excise structure be tailored to the cigarette length rather than the retail prices; and (c) In order to counter the unorganized sector, PTC has also proposed that relief be given to legitimate brands appearing in the lower prices range which have been badly affected by the rise in the excise duty, sales tax resulting in 76 per cent rise in prices in order to enable them to compete effectively and attract volume back into the tax net.

Lakson's View

PTC's competitor mainly Premier Tobacco and Lakson (both under the same management) have reportedly sharply disagreed with the above proposals. they feel that the only way to compete smuggling is to strengthen the domestic industry by way of general reduction in all sectors of the market and reintroduction of the three tier formula keeping in view the realistic prices prevailing now. They have given historical data to prove that problems arose from the day the single slab formula was introduced. Lakson also feels that the market leader has tailored its suggestions to extract maximum benefit for its brands and not the industry as a whole. They have reportedly pleaded with the authorities that the high incidence of duty is a great incentive for evasion and any further increase will only further strengthen the unorganised sector.

On the question of smuggling, the Lakson Group have reportedly suggested that it be countered by fiscal measures as it is not physically possible to police over 200,000 retailers across the country. Since 75 per cent on the population is illiterate, printing of prices to serve as a bench-mark is meaningless.

On the question of charging duty with respect to length rather than price, they feel that its impact would be an increase of 27 per cent of the cheapest brands of the organised sector which will further make it sweater for the unorganized sector to increase their existing market share from 22 per cent to even more. They also feel that the Pakistani smokers in general are now accustomed to smoking international size cigarettes and would not easily switched over to shorter locally produced cigarettes with international brands of comparable prices, like Mild Seven which are easily available. And the unorganized sector will also continue to increase market sales of Kingsize and international size cigarettes at cheap prices if the legitimate sector is limited to short size cigarettes at higher prices, they emphasis.

Lakson has proposed that a capacity tax on flat rate per cigarette maker machine be introduced and the three tier formula be reintroduced in order to put the industry on an even keel.

The Government is believed to have been very sincere in trying to obtain a unified proposal from the cigarette manufacturers to check the falling volumes in cigarette production and the resulting loss in excise duty collection. However, faced with the divergent views on the subject, it will now have to decide on it sown of the changes that need to be done in order to reverse the current trend. The only logical way appears to be to have a deep study of the historical data available with regard to this sector and then come up with the solution recognizing the realistic position on the ground.

Table : Industry Volume (Quantity in Million)
Year Volume % Year
1980-81 34,978.6 -
1981-82 36,053.6 3.07
1982-83 36,287.6 0.65
1983-84 39,191.3 8.00
1984-85 36,884.6 (5.89)
1985-86 38,006.4 3.04
1986-87 36,953.0 (2.77)
1987-88 38,250.9 3.51
1988-89 30,920.7 (19.16)
1989-90 32,111.7 3.85


1990-91 (Estimate) 31,391.8 (2.24)
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Title Annotation:Pakistan
Publication:Economic Review
Date:Aug 1, 1991
Words:1251
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