Asia Illicit Tobacco Indicator 2016: Pakistan. Prepared by Oxford Economics November 2017

Transcription

1 Asia Illicit Tobacco Indicator 216: Pakistan Prepared by Oxford Economics November 217

2 Disclaimer The Asia Illicit Tobacco Indicator 216 Report (the Report ) on the illicit tobacco trade in selected Asian markets (including Australia and New Zealand) has been prepared by Oxford Economics (OE). OE enjoyed academic freedom and full editorial control of the Report. We are grateful for the inputs and data received from public sector and industry stakeholders. OE prepared the Report in accordance with specific terms of reference agreed between Philip Morris International Management SA, an affiliate of Philip Morris International (PM), and OE. Financial support for the Report was provided by PM. OE assume all responsibility for the Report analysis, findings, and conclusion. The terms of reference under which OE were engaged by Philip Morris International Management SA are detailed in the Asia Illicit Tobacco Indicator 216 Methodological Overview Report, available to download via the following link illicittobacco.oxfordeconomics.com 2

3 Pakistan: Legal Domestic Sales Legal Domestic Sales fell by 17.4% in 216, to an estimated 48.7 billion cigarettes. Legal Domestic Sales had been edging down very gradually over the previous three years, from 64 billion in 212 to 59 billion in 215, but the rate of contraction accelerated sharply in 216. Based on data from the Federal Board of Revenue in 215/16, BAT and PM together contribute nearly 98% of total tax revenues from cigarette sales in Pakistan. The government has steadily increased the Excise Tax over the past decade, from PKR 486 per thousand cigarettes in 21 to PKR 1,85 per thousand in 215 (Based on the Most Sold Brand). This is equivalent to an annual average rate of increase of 17% per annum. A more significant increase in the Excise Tax on cigarettes was implemented in 216, taking the Excise Tax yield per thousand cigarettes to PKR 1,534 for the Most Sold Brand in July 216 and 1,649 in December The increase in the Excise Tax in 216 contributed to a 16% increase in the local currency price of a pack of cigarettes of the Most Sold Brand, from PKR 62. in 215 to PKR 72. in Pakistan Legal Domestic Sales: 48.7 cigarettes Price: PKR 72. USD.69 1 Based on PM data. The Most Sold Brand of cigarettes falls into the low tax tier for the purposes of Federal Excise Tax. 2 Price per pack of 2 of the Most Sold Brand in October, based on PM data. 3 Pakistan Market Summary

4 Pakistan: Excise duty applied to cigarettes 3 PKR per 1, cigarettes % , % 1, % 1, % Source: Oxford Economics based on PM data 3 Rate applied in October of each year to the Most Sold Brand. Pakistan: Legal Domestic Sales and prices Cigarette sales PKR per pack of 2 cigarettes 8 7 Cigarettes PKR per pack of 2 cigarettes Source: Oxford Economics based on PM data 4 Legal Domestic Sales based on calendar year. Price per pack of the Most Sold Brand in October of each year. Pakistan Market Summary 4

5 Pakistan: Cigarette The results from two Empty Pack Surveys and Nielsen Retail Audit data were combined with IMS data on Legal Domestic Sales to estimate Total of cigarettes in Pakistan. 1 Total (legal and illicit) was estimated to have risen by.8%, from 86. billion in 215 to 86.7 billion in 216. This is in line with the recent trend in Total, which was broadly stable over the period 212 to 215 since the beginning of the Asia Illicit Tobacco Indicator Report. Illicit Incidence has risen from 31.3% in 215 to 43.7% in 216. This is a marked acceleration of a trend increase in Illicit Incidence that has been underway since 212, when 25.3% of Total was illicit. In volume terms, Illicit rose to 37.9 billion cigarettes in 216 from 27. billion cigarettes in 215. This represents an increase of more than 4% in one year. This was underpinned by an increase in both Illicit Inflows, which rose by 73.8% in 216 to 1.6 billion cigarettes, and Domestic Illicit (i.e. locally manufactured non-duty paid cigarettes), which increased by 31.% to 27.3 billion cigarettes. Domestic Illicit accounted for an estimated 71.9% of total Illicit in 216 and 31.5% of Total. Pakistan: Composition of cigarette consumption Legal Domestic (LDC) Cigarettes % % Cigarettes % Cigarettes % Cigarettes % Cigarettes change Legal Domestic Sales (LDS) Outflows of domestic dutypaid cigarettes Total Inflows (ND) Legal () Illicit Domestic Illicit Total Total Illicit % Source: Oxford Economics 212 results for Illicit based on 211 Q4 Empty Pack Survey. 213 results for Illicit based on 214 Q1 Empty Pack Survey. 1 Empty Pack Surveys were undertaken in 216 Q2 and 216 Q4, while the Retail Audit provides data for each month in 216 (see Report methodology for more details). By comparing sales based on the retail audit with duty-paid volumes sourced from the Pakistan Federal Board of Revenue, this Report estimated the volume of domestically produced cigarettes where the appropriate excise rates were not paid. 5 Pakistan Market Summary

6 Pakistan: Composition of cigarette consumption (% of Total ) % of Total NDI NDI NDI Illicit (NDI) Domestic Illicit Legal () Legal Domestic Source: Oxford Economics Pakistan: Composition of cigarette consumption (number of cigarettes) Cigarettes NDI NDI NDI NDI Illicit (NDI) Domestic Illicit Legal () Legal Domestic Source: Oxford Economics Pakistan Market Summary 6

7 Pakistan: Government Finances Pakistan operates a two-tiered Excise Tax system whereby cigarettes are classified in the low- or high-tax tier based on the retail selling price net of gross sales tax. The Federal Excise Duty (FED) was amended twice in 216. Firstly, in June, the threshold retail selling price that differentiates between low and high tax tier products was raised from PKR 3,6 per thousand cigarettes to PKR 4,. The FED was set at PKR 3,436 per thousand cigarettes for high tax tier cigarettes and PKR 1,534 for low tax tier cigarettes. These rates were subsequently raised in December 216 to PKR 3,75 and PKR 1,649 respectively. Authorities have since reintroduced a three-tiered system of cigarette taxes in 217, with specific duties paid dependent on the retail price. From July 217, cigarette packs selling above a retail price of PKR 4,5 per thousand cigarettes carry a FED of PKR 3,74 per thousand cigarettes; packs selling between PKR 4,5 and PKR 2,925 carry an FED of PKR 1,67; and packs retailing below PKR 2,925 carry an FED of 8. Elsewhere the government is aiming to clamp down on illicit production and sale. The Federal Board of Revenue constituted a joint committee for monitoring, vigilance, and scrutiny of the sector in early 217. Our estimates indicate that the Tax Loss associated with the Illicit of cigarettes in fiscal year 216/17 amounted to PKR 62.9 billion (USD 6 million). This represents an increase of 21.2% in comparison with 215/16. With actual government revenues falling, the Excise Tax Loss as a % of total potential Excise Tax revenues rose to an estimated 42.1%, the highest ratio recorded during the Asia Illicit Tobacco Indicator research. Pakistan: Actual government revenues and estimated Tax Loss 212/13 fiscal year PKR USD mn 213/14 fiscal year PKR USD mn 214/15 fiscal year PKR USD mn 215/16 fiscal year PKR USD mn 216/17 fiscal year PKR USD mn % change in local currency 215/16-216/17 Actual revenue from excise duties on % tobacco Estimated number of illicit cigarettes % purchased (cigarettes ) Estimated Tax Loss from Illicit % Lost excise revenue % Lost VAT revenue % Excise Tax Loss as % of potential total Excise Tax revenues 25.3% 22.% 25.4% 3.6% 42.1% Source: Pakistan Federal Board of Revenue and Oxford Economics based on PM data Estimated number of illicit cigarettes purchased adjusted for fiscal year. Fiscal years run from July to June. 7 Pakistan Market Summary

8 Pakistan: Actual government revenues and estimated Excise Tax Loss 1 8 Actual Excise Tax revenues PKR Estimated Excise Tax Loss FY 212/13 FY 213/14 FY 214/15 FY 215/16 FY 216/17 Source: Pakistan Federal Board of Revenue and Oxford Economics based on PM data Pakistan Market Summary 8

9 Pakistan: Trade Flows Illicit of cigarettes in Pakistan is primarily composed of Domestic Illicit. Illicit accounted for an estimated 28.1% of total Illicit, equivalent to 1.6 billion cigarettes. The bulk of Illicit continues to be composed of other/unspecified Market Variant brands (nearly 93%). 1 The volume of cigarettes entering Pakistan in this category more than trebled between 212 and 216, with the sharpest increase apparent in the past two years. Pine (in generic packaging) was the primary Unspecific Market Variant brand identified, accounting for 46% of total Inflows, while Business Royals comprised a further 1.3%. The number of cigarettes entering Pakistan from Afghanistan also trebled over the same period, and increased by 55.1% in 216 alone (to 524 million cigarettes). However, the volume of Illicit Inflows from Afghanistan is likely to be much higher than this, with anecdotal evidence suggesting that Afghanistan is a significant transit market for Contraband cigarettes entering Pakistan, including Unspecified Market Variant brands such as Pine. 2 Counterfeit cigarettes typically do not account for a substantial portion of consumption in Pakistan, and negligible volumes were again detected in the 216 Empty Pack Surveys. The vast majority of non-domestic cigarettes consumed in Pakistan in 216 were Illicit. We estimate that just 92 million Legal cigarettes were consumed, less than 1% of total Inflows. 3 Pakistan: Origin of total Illicit Inflows 4 Counterfeit mn (-1.%) Afghanistan 524 mn (+55.1%) Total 1,643 mn (+73.8%) Duty-Free labelled products 279 mn (-47.7%) Other / Unspecified 9,84 mn (+88.1%) Cigarettes mn Afghanistan Duty-Free labelled products Counterfeit Other / Unspecified 2,6 3,12 3,65 5,232 9,84 Total 3,11 3,445 3,492 6,125 1,643 Source: IT Flows Model and Oxford Economics 1 Unspecified Market Variant refers to cigarette packs that do not bear specific market labelling or Duty-Free labelling. As such the intended market is not known. 2 See Nielsen (215), The Challenge of Illicit Trade in Cigarettes: Impact and Solutions for Pakistan, and news/biz/212/5/123_11892.html 3 Estimated using passenger data, Smoking Prevalence in tourists country/market of origin, and the duty-free personal import allowance limit. 4 Figures in brackets reflect % change from Pakistan Market Summary

10 Pakistan: breakdown 216 Cigarettes Legal Domestic Sales 48.7 Outflows of duty-paid.1 Legal Domestic 48.7 Domestic Illicit 27.3 Afghanistan.5 Legal Inflows Other Duty-Free labelled products.4 Illicit Other/ Unspecified 9.8 Total Cigarettes Source: IT Flows Model and Oxford Economics Pakistan Market Summary 1

11 Pakistan: Other Estimates Source Comparing consumption estimates with LDC ("bottom up" approach) Euromonitor Passport, 217 Nielsen (215), The Challenge of Illicit Trade in Cigarettes: Impact and Solutions for Pakistan. Retrieved via uploads/215/9/illicit-tobacco- Trade.pdf Industry majors, via Business Recorder, 217 Comment Using data on Smoking Prevalence and average daily consumption of cigarettes, plus UN population data, a "bottom up" estimate of cigarette consumption can be made which can then be compared with LDC. This approach yields an estimate for the Illicit Incidence of 38.8%, or around 4.4 billion cigarettes (based on 213 LDC). The source for Smoking Prevalence and daily cigarette consumption data is the WHO FCTC 214 report (based on the Pakistan Demographic & Health Survey, ). Euromonitor estimates an Illicit Incidence of 36.7% in 216. The methodology, sampling, and coverage are unknown, so it is difficult to assess the robustness of this estimate. Based on analysis of the retail audit conducted in 214, Nielsen find an Illicit Incidence of 23.7% in Total. Industry estimates suggest that 4% of cigarettes sold in Pakistan are nonduty paid. This is well in line with our estimate for 216, which finds that 43.7% are illicit. The same analysis suggests the tax loss is PKR 47 billion, again close to our estimate of tax loss. Pakistan: Alternative estimates of Illicit 5% Oxford Economics (216) Euromonitor (216) Nielsen (214) Bottom up consumption (213) 11 Pakistan Market Summary

12 Pakistan: Data Sources Primary source Calculation Comments Legal Domestic Sales (LDS) Actual shipments for PM and BAT brands based on industry exchange (PM volume is based on taxpaid shipments and BAT volume is based on factory clearance). Outflows of domestic dutypaid cigarettes Empty Pack Survey data in other markets covered in this Report. Empty Pack Survey data in other markets used to identify the presence of packs bearing Pakistan market-specific labelling (e.g., health warnings, tax stamps, etc.). Limited number of Pakistan Market Variant cigarettes identified in other markets covered in this Report. Legal Domestic (LDC) Total Non- Domestic Inflows (ND) Legal () Legal Domestic Sales minus Outflows of legal sales. Sum of Legal and Illicit. Estimated using passenger data, smoking rates, and passenger duty-free personal import allowance. Limited Outflows of duty-paid cigarettes, so Legal Domestic Sales and Legal Domestic closely aligned. Maximum theoretical amount an individual can carry across a border. Passenger data from the UNWTO and OE Tourism Model. Illicit Empty Pack Survey. Based on Empty Pack Survey plus Pakistan retail audit and OE estimates. Estimate derived from the 216 Q2 and 216 Q4 Empty Pack Survey. Estimated illicitly imported cigarettes are relatively modest as a share of consumption. See Report methodology for more details. Domestic Illicit Nielsen Retail Audit. Based on augmentation of retail audit. Illicit cigarettes in Pakistan are mostly domestically produced with a 71.9% share in Total Illicit. Total Illicit Total Sum of Illicit and Domestic Illicit. Legal Domestic Sales minus Outflows of domestic duty-paid cigarettes, plus estimated Legal consumption, plus estimated Illicit. The IT Flows Model estimate of consumption is 86.7 billion cigarettes for 216. Total Tax Loss Total Illicit multiplied by the weighted average tax rates (Excise Tax and GST). See Report methodology for more details. Pakistan Market Summary 12

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