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 the 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
3
2
6
Key Highlights
Farming Sector
a. Tobacco Crop
b. Employment Generated
c. Income Generated
d. Modernising Agricultural
Sector
Manufacturing
Sector
a. Employment Generated
b. Need for Level Playing Field
c. Non-Cigarette Tobacco
Products
8
9
Distribution and
Retailing Sector
a. Current Tobacco Marketing
Dynamics
b. Need for Level Playing Field
Contribution to
the Government
Exchequer
a. Multiple Taxes
b. Large Duty Non-paid Sector
c. Loss of Revenue
d. Need for Level Playing Field
e. Measures Taken by the
Government
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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 is
comparable internationally.
Less than 60% of the tobacco leaf produced in Pakistan is used to manufacture
duty paid cigarettes. The remaining amount is used to produce duty non-paid
cigarettes, 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
Employment Generated (Direct & Indirect)
Source of Livelihood
Income Generated in FY 2009
70,000 people
260,000 people
Rs. 10 billion
There is need to ensure that the tobacco control laws imposed by the
Government are complied with by all the tobacco industry players to create
a level playing field.
Distribution & Retailing Sector
No. of Outlets Selling Tobacco Products
Employment Generated (Direct & Indirect)
Source of Livelihood
Income Generated in FY 2009
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 up
of tax paid to the Government.
Failure to force illicit manufacturers to pay the applicable taxes imposes a
higher burden on tax compliant manufacturers to make up for shortfall in
Government
,
s revenue collection.
Illicit trade in duty non-paid, counterfeited or smuggled cigarettes affects
the social fabric of the society, promotes criminality and breach of
Intellectual Property Rights.
Often, illicit tobacco products also do not comply with local tobacco control
laws 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 in
the 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.
Summary
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Nearly 100,000 tonnes of tobacco is grown annually on more than
50,000 hectares.
Tobacco Crop
The cultivation of tobacco generates following employment:
Employment Generated
Farming Sector
75%
3%
1%
21%
NWFP PUNJAB SINDH BALUCHISTAN
Share of Provinces in Tobacco Crop in Pakistan
Employment Generated
Direct
72,000
Indirect
8,000
Total
80,000
Tobacco is a valuable and reliable cash crop for thousands of
farmers in Pakistan and plays a critical economic role in some
regions of Pakistan.
Full Time Employment (FTEs)
In 2009, nearly 80,000 farmers sold tobacco crop worth Rs. 8.5 billion
1

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
Year
Cost of
Production
4

Minimum
Prices
5
% Min. Price
Increase from
last year
Country
Inflation %
Weighted
Average
Prices paid
to Farmers
6

%
Increase
(paid to
Farmers)
2007
2008
2009
59.17
64.21
72.50
60.35
67.00
82.00
35.7
11.0
22.4
6.20
7.93
13.6
65.59
76.48
101.41
47
16
33
Exports
Year
Quantity
(M.Kgs.)
Value
(M. Rs.)
Imports
Year
Quantity
(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 tobacco
crop 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 per
hectare which is comparable internationally.
Nearly 44% of tobacco production is not covered in the regulatory
net that creates an un-level playing field for the tax-paying
cigarette industry.
Export/Import of Raw Tobacco
5 4
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 from
locally manufactured duty non-paid cigarettes, counterfeited
cigarettes and smuggled cigarettes.
Need for Level Playing Field
The availability of smuggled and duty non-paid cigarettes is a critical
fiscal concern for the Government, as this tax evasion is estimated to
deny the Government Rs. 8.5 billion
9
in annual revenue. This illicit
trade in tobacco products also promotes criminality in the form of
smuggling and tax evasion and breach of Intellectual Property Rights
through 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 are
manufactured at cottage industry level and have very little
mechanisation 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 substantial
competitive disadvantage for tax-paying cigarette manufacturers.
Regulators and tax-paying tobacco industry have common interest
to ensure that this duty non-paid sector also complies with all the
relevant laws.
The non-cigarette tobacco products in Pakistan are unregulated.
Manufacturing Sector
There are 50 cigarette manufacturing companies registered in Pakistan.
Tobacco manufacturers generate considerable economic activity
during production. These create:
Direct manufacturing jobs including jobs associated with
procurement, production and distribution activities; and
Indirect jobs created by acquiring transport and logistic services,
information technology and communications services,
manufacturing equipment, property, business services and
insurances.
Cigarette Market (2009)
Employment Generated
Employment Generated
Pakistan Tobacco Company Limited
Lakson Tobacco Company Limited
Others (including duty non-paid, counterfeit,
smuggling)
8

Sticks (billion)
41
29
15
85 Total
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 manufacturing
units in the form of plants, machinery, equipments, etc.
exceeds Rs. 15 billion.
Tobacco manufacturing industry generates annual income of
more than Rs. 10 billion and is a source of livelihood for nearly
260,000 people in Pakistan.
Total
7 6
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Contribution to the
Government Exchequer
Multiple Taxes
There are multiple taxes imposed on tobacco products in Pakistan.
These include:
i) Federal Excise Duty (FED): It is charged and collected on locally
manufactured 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 FED
incidence goes upto 64%.
11
ii) Sales Tax: In addition, Sales Tax (at a rate of 16%) on the Retail
Price is also imposed on imported and locally manufactured
cigarettes.
iii) Special Excise Duty: A Special ad valorem Excise Duty is
collected and levied at the rate of 1% on retail price less FED.
iv) Customs Duty: 35% ad valorem Customs Duty plus 15% Luxury
Duty (total duty: 50%) is levied on the import of finished tobacco
products.
v) Federal Tobacco Cess (FTC):
12


FTC (at a rate of 3%) is levied
by the Pakistan Tobacco Board on unmanufactured tobacco.
vi) NWFP Tobacco Development Cess (TDC):

NWFP Government
collects 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)
30
34.6
36.6
46.7
55
(Projected)
40
30
20
10
0
2007 2008 2009 2010
Increase in Fiscal Contribution by Tax-paying
Cigarette Industry
In Financial Year 2008-09, nearly Rs. 50 billion were contributed to
national treasury by the tax paying cigarette industry in Pakistan
out 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 and
Retailing Sector
Employment Generated
Current Tobacco Marketing Dynamics
Pakistan has a huge and complex tobacco distribution and retail
network scattered over a vast terrain. Wide array of outlets ranging
from small paan shops to large superstores are involved in retailing of
tobacco products. 60% of the outlets are located in the rural market
and 40% are in the urban markets. The rural outlets are generally
small and majority of them are kiryana stores.
Tobacco product advertisement, promotion, and sponsorship is
severely restricted in Pakistan. Some of the key regulations introduced
by the Government in this regard include ban on use of consumer
incentives and free samplings; virtual ban on advertisements on
electronic media; ban on advertisements in print media; ban on
advertisements through billboards; ban on advertisements through
shop fascias; and ban on sponsoring any activity or event targeted
towards youth.
Need for Level Playing Field
Unfortunately, not all industry players comply with the prescribed
Government regulations. Many retail outlets in Pakistan can be seen
selling cigarette packs without the mandatory health warnings.
Smuggled brands are also openly sold in the market. Appropriate
action, in accordance with national laws and policies, needs to be
taken against these violations.
Retail and distribution of tobacco products generates annual
income of more than Rs. 12 billion and is a source of livelihood
for nearly 700,000 people.
There is need to ensure that restrictions on advertisement and
promotion are complied with by all tobacco industry players to
create a level playing field.
More than 500,000 outlets sell tobacco products at retail level in
Pakistan.
No. of Persons
130,000
30,000
30,000
190,000 Total
9 8
End Notes
1
Based on Desktop research conducted by Pakistan Tobacco Company
Limited based on data and information available in the public
domain.
2
Considering that an average household in Pakistan has 1.87 employed
members supporting approximately 6.75 persons, one employed
person supports an average of 3.6 family members (Nielsen 2007).
3
The minimum support price gives a guarantee to farmers that even in
surplus supply situation the prices will not go down below the
minimum price. This minimum price is calculated from Cost of
Production (COP).
4
A detailed procedure is in place to determine the COP that is overseen
by Pakistan Tobacco Board and Ministry of Food & Agriculture.
5
As 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 the
Ministry of Health have not conducted any formal research on this
issue. All stakeholders, however, agree that these are acceptable
estimates of the duty non-paid sector.
9
These estimates are based on regular market and retail research
conducted by the industry.
10
These 500,000 plus retail outlets are estimated to have about
815,000 people working in them. On average cigarette turnover at
these outlets makes 16% of the total turnover. Taking the same
proportion 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 low
segment, ad valorem on the high segment and a mixture of both in
the middle segment.
12
Federal Tobacco Cess (FTC) is levied under Section 9 of Pakistan
Tobacco Board Ordinance 1968 and collected under S.R.O. No.8/98
of 7th January 1998.
13
These are figures of revenue deposited with the Federal Board of
Revenue.
14
These measures include: Documentation of 5 independent Green Leaf
Thrashing plants; Printing of manufacturer
,
s name & retail price;
Third party Audits; Destruction of machinery and Confiscation of
Conveyance used for counterfeit; Disclosure of Bank Accounts;
Submission of Audited Bank Accounts to Federal Board of Revenue
and the Sealing of excess manufacturing capacity.
Large Duty Non-paid Sector
An estimated 82% of the market share belongs to PTC & LTC both of
which contributed nearly Rs. 46 billion to the national exchequer during
the 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.
Need for Level Playing Field
The availability of duty non-paid and smuggled cigarettes causes
substantial competitive disadvantage for tax-paying cigarette manu-
facturers as most of such duty non-paid cigarettes are available in the
market below the Government stipulated Minimum Price (as of 1st
July 2009, the Federal Board of Revenue has notified that the
minimum 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% duty
non-paid sector into the tax net. There is, however, urgent need to
support increased compliance related activities to bring down this
duty non-paid sector that would result in more revenue for the
Government and create a level playing field for all tobacco industry
players.
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 Others
13
0
10
20
30
40
50
60
70
Pakistan Tobacco
Company
Lakson Tobacco
Company
Others
Loss of Revenue
In Financial Year 2008-09, nearly 15 billion duty non-paid cigarettes
were sold in Pakistan. This tax evasion is estimated to deny the
Government Rs. 8.5 billion in annual revenue. In the absence of this
duty non paid sector the tax paying industry would have been in a
much better position to increase the price of its products which would
eventually increase the revenue of Government exchequer.
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