pakistan tobacco industry - economic impact 2010

8/12/2019 Pakistan Tobacco Industry - Economic Impact 2010

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In 2007, Pakistan Tobacco Company Limited commissioned a detailed research on the Economic Impact of Tobacco

Industry in Pakistan, which was conducted by Nielsen (www.nielsen.com). The research involved collecting and compiling

the published information related to t he tobacco industry, whereas field interviews from the experienced industry people

and relevant stakeholders were also used to update the available published data.

In 2009, Pakistan Tobacco Company Limited updated the said 2007 Nielsen Report. The 2009 updating exercise employed

the template and methodology used by 2007 Nielsen Report and wherever possible incorporated the latest data and

information available in the public domain. This data included Statistical Bulletin published by Pakistan Tobacco Board in

2007, Reports and Audited Accounts annually published by the Tobacco Companies under corporate law requirements,

regular Market and Retail Research conducted by Nielsen for Pakistan Tobacco Company Limited (Retail Audit, Retail

Establishment Survey, General Consumer Survey), and data from Federal Board of Revenue, Federal Bureau of Statistics and

Household Integrated Economic Survey 2004-05.

Contents

Summary

4

2

6

Key Highlights

Farming Sectora. Tobacco Crop

b. Employment Generated

c. Income Generated

d. Modernising Agricultural Sector

Manufacturing

Sectora. Employment Generated

b. Need for Level Playing Field

c. Non-Cigarette Tobacco

Products

8

9

Distribution and

Retailing Sectora. Current Tobacco Marketing

Dynamics

b. Need for Level Playing Field

Contribution to

the Government

Exchequera. Multiple Taxes

b. Large Duty Non-paid Sector

c. Loss of Revenue

d. Need for Level Playing Field

e. Measures Taken by the

Government

Overview&EconomicContribution


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Key Highlights

Pakistan is the 7th largest Flue Cured Virginia tobacco producer in the world.

Tobacco is one of the few crops in Pakistan that has yield per hectare which iscomparable internationally.

Less than 60% of the tobacco leaf produced in Pakistan is used to manufactureduty paid cigarettes. The remaining amount is used to produce duty non-paidcigarettes, and unregulated products such as bidi, naswar and hookah.

The total investment in tobacco manufacturing units in the form of plants,machinery, equipments, etc. exceeds Rs. 15 billion.

Farming Sector

Employment Generated (Direct & Indirect)

Source of Livelihood

Income Generated in FY 2009

80,000 farmers

300,000 people

Rs. 8.5 billion

Manufacturing Sector




70,000 people

260,000 people

Rs. 10 billion

There is need to ensure that the tobacco control laws imposed by theGovernment are complied with by all the tobacco industry players to createa level playing field.

Distribution & Retailing Sector

No. of Outlets Selling Tobacco Products




500,000+

200,000 people

700,000 people

Rs. 12 billion

Duty Paid Cigarettes

Contribution to Government Exchequer

Illicit Tobacco Industry

Loss to Government

70 billion sticks

Rs. 50 billion

15 billion sticks

Rs. 8.5 billion

Between 64% to 81% of the retail price of a pack of cigarettes is made upof tax paid to the Government.

Failure to force illicit manufacturers to pay the applicable taxes imposes ahigher burden on tax compliant manufacturers to make up for shortfall inGovernment

,s revenue collection.

Illicit trade in duty non-paid, counterfeited or smuggled cigarettes affectsthe social fabric of the society, promotes criminality and breach ofIntellectual Property Rights.

Often, illicit tobacco products also do not comply with local tobacco controllaws such as requirement for printing health warnings.

Contribution to the Government Exchequer

The tobacco industry plays a critical economic role in Pakistan by

generating income and employment in the tobacco farming,

manufacturing, distribution and retailing.

There are almost 350,000 people, directly and indirectly, working inthe tobacco industry. They generate a total annual income of over Rs.

30 billion, which is a source of livelihood for 1.2 million people. The

overall economic contribution becomes more pronounced if the

appproximately Rs. 15 billion investments made by tobacco industry

in the form of productive plants, machinery and equipment are also

taken into full consideration.

The tobacco industry also contributes towards developing the

industrial sector by introducing international standards and global

best practices in critical areas such as Environment, Health and Safety.

This Industry is also one of the few that is truly developing the human

resource potential of Pakistan.

Tobacco is one of the few crops in Pakistan that has yield per hectare

comparable to international standards. Tobacco farmers, trained in

good agriculture practices by the tobacco industry, are known to

have applied their knowledge to other crops resulting in increased

yields of those other crops too.

The industry is also a main contributor to the Government exchequer

with nearly Rs. 50 billion collected in the forms of Excise Tax, Sales

Tax, Tobacco Development Cess, and other taxes. However, nearly

one out of five cigarettes sold in Pakistan have either been

manufactured or smuggled without paying the appropriate taxes

resulting in an estimated annual loss of Rs. 8.5 billion to the

Government. As the Government experiences a shortfall in revenue

collection, the tax compliant section of the industry is constantly

pressed with higher tax rates leading to higher prices that further

reduce the competitiveness of tax paid cigarettes vis--vis illicit

cigarettes.

Both regulators and tax compliant tobacco industry have a common

interest to reduce the level of illicit cigarettes from the current 18% of

the market. There is urgent need to support increased compliance

related activity to enhance revenue for the Government and create a

level playing field for everyone.

SummaryOverview&EconomicContribution


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Nearly 100,000 tonnes of tobacco is grown annually on more than50,000 hectares.

Tobacco Crop

The cultivation of tobacco generates following employment:

Employment Generated

Farming Sector

75%

3%1%

21%

N WF P P UN JA B S IN DH B AL UC HI STA N

Share of Provinces in Tobacco Crop in Pakistan


Direct

72,000

Indirect

8,000

Total

80,000

Tobacco is a valuable and reliable cash crop for thousands offarmers in Pakistan and plays a critical economic role in someregions of Pakistan.

Full Time Employment (FTEs)

In 2009, nearly 80,000 farmers sold tobacco crop worth Rs. 8.5 billion1

that is a source of livelihood for nearly 300,000 people in the country.2

The Government fixes a minimum support price for tobacco crop

annually.3 In reality, farmers have always been paid prices that are

higher than the stipulated minimum price evident from this table below:

Income Generated

A lot of time and effort is invested in sharing best practices and

transferring modern skills and technology to the tobacco farmers. All

this is undertaken in close collaboration with Pakistan Tobacco Board

and Provincial Agricultural Departments, being an example of

public-private partnership. Some of the key initiatives introduced for

modernising tobacco farming in Pakistan include: Wider Spacing

Plantation; Safe Use of Pesticides; Integrated Pest Management;

Mechanical Ridgers; Specially Formulated Fertiliser for Tobacco; Coal

Briquettes for curing barns, and Introduction of Contract Farming.

Modernising Agricultural Sector

YearCost of

Production4Minimum

Prices5

% Min. PriceIncrease from

last year

CountryInflation %

WeightedAveragePrices paid

to Farmers6

%Increase(paid toFarmers)

20072008

2009

59.1764.21

72.50

60.3567.00

82.00

35.711.0

22.4

6.207.93

13.6

65.5976.48

101.41

4716

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Exports

YearQuantity

(M.Kgs.)

Value

(M. Rs.)

Imports

YearQuantity

(M.Kgs.)

Value

(M. Rs.)

2005-06

2006-07

365

544

4.83

5.77

2005-06

2006-07

2.57

2.91

447

581

30%

Tax Paying Manufacturers

Others (including duty non-paid and counterfeit manufacturers

Manufacturers of Other Products (bidi, hukka and naswar)

14% 56%

Tobacco Consumption by Different

Manufacturers (% share)

The law prescribes that the weighted average price for the tobaccocrop in a year shall not be lower than the previous year price. 7

Tobacco is one of the few crops in Pakistan that has yield perhectare which is comparable internationally.

Nearly 44% of tobacco production is not covered in the regulatorynet that creates an un-level playing field for the tax-payingcigarette industry.

Export/Import of Raw Tobacco

54

2,600

2,550

2,500

2,450

2,400

2,350

2,300

2,250

2,200

Yield (kg/hectare)

2004

2,323

2,402 2,419

2,546

2005 2006 2007

Yield of Cigarette Type Tobacco in Pakistan


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Non-cigarette Tobacco Products

The tobacco industry in Pakistan is facing unfair competition fromlocally manufactured duty non-paid cigarettes, counterfeitedcigarettes and smuggled cigarettes.

Need for Level Playing Field

The availability of smuggled and duty non-paid cigarettes is a criticalfiscal concern for the Government, as this tax evasion is estimated todeny the Government Rs. 8.5 billion9in annual revenue. This illicittrade in tobacco products also promotes criminality in the form ofsmuggling and tax evasion and breach of Intellectual Property Rightsthrough counterfeiting.

The non-cigarette products (hand-rolled cigarette (bidi), water pipes(hukka), snuff (naswar) and chewing tobacco) consume almost 30%of the tobacco produced in the country. These products aremanufactured at cottage industry level and have very littlemechanisation in their manufacturing.

34%48%

1%17%

Pakistan Tobacco Company

Others (including duty non-paid and counterfeit) Smuggled

Total Market Share

Lakson Tobacco Company

The availability of duty non-paid cigarettes causes substantialcompetitive disadvantage for tax-paying cigarette manufacturers.

Regulators and tax-paying tobacco industry have common interestto ensure that this duty non-paid sector also complies with all therelevant laws.

The non-cigarette tobacco products in Pakistan are unregulated.

Manufacturing SectorThere are 50 cigarette manufacturing companies registered in Pakistan.

Tobacco manufacturers generate considerable economic activityduring production. These create:

Direct manufacturing jobsincluding jobs associated withprocurement, production and distribution activities; and

Indirect jobscreated by acquiring transport and logistic services,information technology and communications services,manufacturing equipment, property, business services andinsurances.

Cigarette Market (2009)



Pakistan Tobacco Company Limited

Lakson Tobacco Company Limited

Others (including duty non-paid, counterfeit,

smuggling)8

Sticks (billion)41

29

15

85Total

Cigarettes

Hukkah, Naswar, Bidi,Chewing tobacco

Direct

8,000

14,000

22,000

Indirect

48,000

2,000

50,000

Total

56,000

16,000

72,000

The total investment in Pakistan in tobacco manufacturingunits in the form of plants, machinery, equipments, etc.exceeds Rs. 15 billion.

Tobacco manufacturing industry generates annual income ofmore than Rs. 10 billion and is a source of livelihood for nearly260,000 people in Pakistan.

Total

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Contribution to theGovernment ExchequerMultiple Taxes

There are multiple taxes imposed on tobacco products in Pakistan.These include:

i) Federal Excise Duty (FED): It is charged and collected on locallymanufactured and imported cigarettes on the basis of Retail Price.For imported cigarettes, FED is applied at a maximum rate of 64%of the Retail Price and for locally manufactured cigarettes the FEDincidence goes upto 64%.11

ii) Sales Tax:In addition, Sales Tax (at a rate of 16%) on the RetailPrice is also imposed on importedandlocally manufacturedcigarettes.

iii) Special Excise Duty:A Special ad valoremExcise Duty iscollected and levied at the rate of 1% on retail price less FED.

iv) Customs Duty:35% ad valoremCustoms Duty plus 15% LuxuryDuty (total duty: 50%) is levied on the import of finishe d tobacco

products.v) Federal Tobacco Cess (FTC):12 FTC (at a rate of 3%) is leviedby the Pakistan Tobacco Board on unmanufactured tobacco.

vi) NWFP Tobacco Development Cess (TDC): NWFP Governmentcollects a levy at the rate of Rs. 2 per kg for Flue-cured Virginia,Burley and Dark Air Cured varieties and Rs. 1 per Kg for White Patta.

2006

60

50

Annual Excise and Sales Tax Contribution (Rs. Billion)

3034.6 36.6

46.755

(Projected)

40

30

20

10

0

2007 2008 2009 2010

Increase in Fiscal Contribution by Tax-payingCigarette Industry

In Financial Year 2008-09, nearly Rs. 50 billion were contributed tonational treasury by the tax paying cigarette industry in Pakistanout of which Rs. 46.7 billion was Excise and Sales Tax contribution.

Excise and Sales Tax incidence on cigarettes ranges from 64%to 81%.

Working at retail outlets 10

Working in distribution and wholesale

Indirect employment

Distribution andRetailing Sector


Current Tobacco Marketing Dynamics

Pakistan has a huge and complex tobacco distribution and retailnetwork scattered over a vast terrain. Wide array of outlets ranging

from small paan shops to large superstores are involved in retailing oftobacco products. 60% of the outlets are located in the rural marketand 40% are in the urban markets. The rural outlets are generallysmall and majority of them are kiryanastores.

Tobacco product advertisement, promotion, and sponsorship isseverely restricted in Pakistan. Some of the key regulations introducedby the Government in this regard include ban on use of consumerincentives and free samplings; virtual ban on advertisements onelectronic media; ban on advertisements in print media; ban onadvertisements through billboards; ban on advertisements throughshop fascias; and ban on sponsoring any activity or event targetedtowards youth.


Unfortunately, not all industry players comply with the prescribedGovernment regulations. Many retail outlets in Pakistan can be seenselling cigarette packs without the mandatory health warnings.Smuggled brands are also openly sold in the market. Appropriateaction, in accordance with national laws and policies, needs to be

taken against these violations.

Retail and distribution of tobacco products generates annualincome of more than Rs. 12 billion and is a source of livelihoodfor nearly 700,000 people.

There is need to ensure that restrictions on advertisement andpromotion are complied with by all tobacco industry players tocreate a level playing field.

More than 500,000 outlets sell tobacco products at retail level inPakistan.

No. of Persons

130,000

30,000

30,000

190,000Total

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End Notes1 Based on Desktop research conducted by Pakistan Tobacco Company

Limited based on data and information available in the publicdomain.

2 Considering that an average household in Pakistan has 1.87 employed

members supporting approximately 6.75 persons, one employedperson supports an average of 3.6 family members (Nielsen 2007).

3 The minimum support price gives a guarantee to farmers that even insurplus supply situation the prices will not go down below theminimum price. This minimum price is calculated from Cost ofProduction (COP).

4A detailed procedure is in place to determine the COP that is overseenby Pakistan Tobacco Board and Ministry of Food & Agriculture.

5As fixed by Pakistan Tobacco Board.6 This is the actual price paid to farmers by Pakistan Tobacco Company

Limited.7 Martial Law Order-487 of 1985 in respect of NWFP (where 75% of

tobacco is grown).8 The estimates are based on regular market and retail research

conducted by the Industry. The Federal Board of Revenue and theMinistry of Health have not conducted any formal research on thisissue. All stakeholders, however, agree that these are acceptableestimates of the duty non-paid sector.

9 These estimates are based on regular market and retail researchconducted by the industry.

10 These 500,000 plus retail outlets are estimated to have about815,000 people working in them. On average cigarette turnover atthese outlets makes 16% of the total turnover. Taking the sameproportion in employment the number of employees working only

for cigarettes comes out to be almost 130,000.11 For locally manufactured cigarettes, there exists a 3-tier FED structure

based on retail price. It is a combination of fixed duty on the lowsegment, ad valorem on the high segment and a mixture of both inthe middle segment.

12 Federal Tobacco Cess (FTC) is levied under Section 9 of PakistanTobacco Board Ordinance 1968 and collected under S.R.O. No.8/98of 7th January 1998.

13 These are figures of revenue deposited with the Federal Board ofRevenue.

14 These measures include: Documentation of 5 independent Green LeafThrashing plants; Printing of manufacturer

,s name & retail price;

Third party Audits; Destruction of machinery and Confiscation ofConveyance used for counterfeit; Disclosure of Bank Accounts;Submission of Audited Bank Accounts to Federal Board of Revenueand the Sealing of excess manufacturing capacity.

Large Duty Non-paid Sector

An estimated 82% of the market share belongs to PTC & LTC both ofwhich contributed nearly Rs. 46 billion to the national exchequer duringthe Financial Year 2008-09 (FED and Sales Tax only). In contrast, the,Others

, with 18% market share contributed around Rs. 0.30 billion to

the national exchequer during the Financial Year 2008-09.


The availability of duty non-paid and smuggled cigarettes causessubstantial competitive disadvantage for tax-paying cigarette manu-

facturers as most of such duty non-paid cigarettes are available in themarket below the Government stipulated Minimum Price (as of 1stJuly 2009, the Federal Board of Revenue has notified that theminimum price for a pack of 20 cigarettes is Rs. 19.50).

Measures Taken by the Government

Government of Pakistan has taken many steps to bring this 18% dutynon-paid sector into the tax net. There is, however, urgent need tosupport increased compliance related activities to bring down thisduty non-paid sector that would result in more revenue for theGovernment and create a level playing field for all tobacco industryplayers.

This illicit trade in tobacco products promotes criminality(smuggling and tax evasion) and breach of Intellectual Property

Rights (counterfeiting).

10

Market Share

48%

68.3%

34%31%

18%

0.7%

Share in Tax Contribution

Comparison of Tax-paying Industry

and Others13

0

10

20

30

40

50

60

70

Pakistan TobaccoCompany

Lakson TobaccoCompany

Others

Loss of Revenue

In Financial Year 2008-09, nearly 15 billion duty non-paid cigaretteswere sold in Pakistan. This tax evasion is estimated to deny theGovernment Rs. 8.5 billion in annual revenue. In the absence of thisduty non paid sector the tax paying industry would have been in amuch better position to increase the price of its products which wouldeventually increase the revenue of Government exchequer.

Overview&

EconomicContribution

Overview&

EconomicContribution

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pakistan tobacco industry - economic impact 2010

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