- Need to rightly follow laws and regulations
Interview with Muhammad Zeeshan — Chief Financial Officer, Philip Morris Pakistan Limited (PMPKL)
[box type=”shadow” align=”” class=”” width=””]Profile
Muhammad Zeeshan is having an Executive Director and Chief Financial Officer role. He is a qualified chartered accountant and joined the company in 2008 and is currently the CFO at Philip Morris (Pakistan) Limited PMPKL. [/box]
PAGE: In a nutshell, how has illicit cigarette trade hampered legit trade in Pakistan and what benefits can be gained to the economy from the uniform application of laws?
Zeeshan: Pakistan’s total market is approx. 80 billion out of which illicit incidence is to the tune of 37-40% which is larger than the total consumption in most countries. With this level of illicit segment, Pakistan has the highest number of illicit cigarettes sold in Asia.
In general, lack of uniform application of laws and regulations create a non-level playing field for compliant business and multinationals. This erodes investor confidence and discourages Foreign Direct Investment (FDI) which has been an ongoing challenge for Pakistan.
Specific to the tobacco industry, as the laws are not being enforced, the mentioned level of cigarettes sold in Pakistan are illicit non-tax paid i.e., they are sold at a price lower than the minimum price, i.e. Rs 63/pack, prescribed under tax laws for the purposes of levy and collection of federal excise duty. In addition to violating tax laws, illicit non-tax-paid cigarette manufacturers continue to disregard tobacco control laws such as underage sales, advertisements at retail and offering incentives to public, a uniform application of law will help stop the violations resulting in the government gaining more revenue and achieving its public health objectives. Additionally, this will also ensure creation of a level playing field for all players in the tobacco sector which will result in increased investor confidence thus increase in local and foreign investments to further improve the microeconomic issues.
Prime Minister, Imran Khan has also quoted at several forums that only two [tobacco] companies pay 98 percent of total tax [tobacco collection] constituting 60% market share, while remaining companies producing 40 percent cigarettes in the country only contribute to meagre 2% tax revenues to the national exchequer.
PAGE: What are the major problems being faced by Pakistan’s cigarette industry?
Zeeshan: The biggest challenge faced by Pakistan’s tax-paying cigarette industry is the lack of a level playing field under which there are two concerns: tax evasion and violations under the tobacco control laws.
PAGE: Why aren’t cigarette sales declining despite an increase in the tax rate on cigarettes?
Zeeshan: The core issue is to understand the implications of excise duty on cigarette consumption. It is an established principle endorsed by the International Monetary Fund and World Bank that an increase in taxes will create an incentive for illicit trade which has to be countered with effective enforcement. To elaborate, increasing taxes, without having a proper enforcement mechanism in place will not impact consumption but will only change the consumption patterns where people will switch from tax-paid to non-tax-paid products. Same is the issue with the cigarette industry in Pakistan. Enforcement has been an ongoing challenge and increases in cigarette taxes have shifted the consumption from tax paid to non-tax paid cigarettes. Over the years (barring last 2 years of no change in excise) with every excise increase tax-paid cigarette volumes have decreased whereas there has been negligible impact on overall consumption. Thus, it will be fair to suggest that excise increases without proper enforcement has negatively impacted government revenue and public health objectives.
Excise driven price increase of tax-paid cigarettes widen the price gap between tax-paid and non-tax paid cigarettes and in our view has been a primary driver of increase in sale of non-tax paid cigarettes.
PAGE: To what extent can the track and trace system be useful in documenting the cigarette industry?*
Zeeshan: There are primarily two types of illicit cigarettes sold in Pakistan today. One is a smuggled cigarette pack that does not have the government-mandated pictorial health warnings and other markings, however, the incidence of smuggled cigarette in Pakistan is relatively low. The major issue is the availability of low priced locally manufactured tax-evaded cigarette packs. Currently it is very difficult to distinguish between a tax-paid and a non-tax-paid cigarette pack. The introduction of a physical tax stamp will resolve this particular issue if implementation is followed by effective enforcement at all levels. The track and trace system, a commendable effort (recently launched by the FBR) can be a very effective tool to counter illicit cigarettes, however, what is very important to understand is that Track and Trace is merely a tool to facilitate enforcement and without enforcement, it is bound to fail as it has failed in a number of other countries such as Malaysia where illicit cigarette incidence is in excess of 60% despite having a track and trace system. A robust enforcement mechanism has to be in place for the success of the track and trace system without which it will just be an additional cost with no benefit for the industry or the government. This is one of the landmark achievements by the government, which we are excited about and will take every step to assist the government, make track and trace a success.
PAGE: How can the illicit non-tax paid tobacco trade to the economy be reduced?
Zeeshan: The track and trace system, one of the landmark achievement by FBR, can be a very effective tool to counter illicit cigarettes, however, Track and Trace will only facilitate enforcement and without enforcement, the entire initiative will collapse. Through effective enforcement of Tax and Tobacco control laws, we believe that Track and Trace is a very positive development, provided FBR ensures an across-the-board implementation, including AJ&K.
PAGE: The purpose of the tax on cigarettes is to protect public health. In your opinion, should the government and policymakers rely only on tax measures to protect public health?
Zeeshan: As a general principle of price elasticity, increasing prices (excise driven) has the potential to reduce consumption. However, increasing taxes can have unintended consequences as is the case of Pakistan where with every excise increase it has been witnessed that the sale of non-tax paid cheap cigarettes increases.
As a company, we support government public health objectives, however, it is must to ensure that there is a level playing field and that all cigarette manufacturers pay the due tax on cigarettes and also follow all tobacco control laws.
In summary, a level playing field, enforcement of tax and tobacco control laws will help the government achieve its revenue and public health objectives. Tobacco Harm Reduction (THR) is also a very important aspect that the government should look into as an important pillar to achieve public health objectives. THR is a concept that has been adopted by a number of developed countries where they are promoting the switch from combustible cigarettes to non-combustible alternatives. A primary and leading example is the Stoptober drive-by Public Health England.
PAGE: What are some of Philip Morris (Pakistan) Limited’s key sustainability initiatives for harm reduction?
Zeeshan: Philip Morris (Pakistan) Limited is a socially responsible organization with a keen sense of sustainable development in the communities we work in. Our key focus is on environment protection and community uplifting efforts.
We have launched #MissionCleanerPakistan across all major cities of Pakistan and carried out anti-littering drives, awareness sessions and placing waste disposal bins across major cities in all four provinces through 20 drives. All the collected waste was recycled in a sustainable manner through our recycling partners and communities were being engaged.
We engaged more than 2400 volunteers and collected more than 4000 KGs of trash across Pakistan.
PMPKL is striving to reduce its carbon footprint by transforming its operations. Among other initiatives, PMPKL converted the boiler fuel at its Green Leaf Threshing Plant from furnace oil to Liquefied Petroleum Gas which alone is expected to reduce the CO2 emissions by a staggering 30%. This translates into a reduction of 2200 tons of carbon emissions in the next five years.
Similarly, there are numerous initiatives to support farmers and communities we work in. Our crop diversification program is enhancing the economic and financial resilience of tobacco farmers by increasing their ‘Living Income’ through the cultivation of alternative and non-traditional crops.
PMPKL is focusing on mechanizing multiple activities through provision of ‘subsidized’ machinery to its contracted farmer. PMPKL has provided Re-Ridgers & Transplanters which are gaining popularity amongst the farmer community. Another major initiative is the provision of “Tobacco Stringing Machines” which are not only cost-effective but also designed to keep children away from the laborious task of stringing tobacco leaves together before their curing process.
As part of our aim to foster innovation and promote social entrepreneurship, PMPKL in partnership with local NGOs launched a program to support and fund start-ups. So far 150 startups have been engaged all over Pakistan and the top 3 finalists from the Program were awarded USD 10,000 each.