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The unannounced increase in cigarette prices

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Manufacturers hold incessant currency devaluation and rising prices of raw materials responsible for price hike

 By Syed M. Aslam
August 23 - 29, 1999

The post-budget increases in the price of almost all brands of cigarettes have nothing to do with the budget. In fact, local cigarette manufacturers have timed the post-budget confusion to resort to unannounced price increase, PAGE investigation revealed.

Among other things the finance minister announced increase in the excise duty on cigarettes. Though the increase was not to be affected till the first of July, the first day of fiscal year in Pakistan, the prices of all brands of cigarettes went up within days after the Budget 1999-2000 was announced on June 12. Two weeks later the increase was withdrawn by the government but the prices were not reduced.

While the smokers are made to dig deeper into their pockets, the government has chosen not to take note of the unannounced price increase for obvious reasons. Cigarette consumption in Pakistan, like other parts of the world, is subjected to high rate of taxes to earn a substantial revenue for the government.

Local cigarette market in Pakistan comprise of two basic segments— low-price segment and high-price segment. A fixed 63 per cent of the retail price of high-price segment and as much as 42.6 per cent of low-priced segment, goes towards government’s excise duty. In addition, the government charges an additional 15 per cent sales tax on the overall cigarette sales.

The low-priced segment includes all those brands whose prices do not exceed Rs 4.50 per ten cigarettes. The central excise duty on all such brands is fixed at Rs 1.77. All other brands whose prices exceed Rs 4.50 per ten cigarettes are subjected to a fixed excise duty of 63 per cent of the retail price.

Any increase in cigarette prices thus means additional revenues for the government as both the excise duty and sales tax are in-built part of the retail prices. However, due to unspoken alliance between the cigarette manufacturers, the government has failed to take smokers into confidence which have forced many, who could afford, to switch over to more expensive foreign brands, many of which are smuggled into the country.

Despite a lapse of two months since the announcement of the federal budget, and despite the unannounced price increase, the locally manufactured cigarettes are still being sold in packs which carry old price tags. There seems to be no haste on the part of the manufacturers to retail their respective brands in packs which depict new prices. This provides an opportunity for the retailers to sell cigarettes at a premium at the expense of smokers who are being kept in the dark.

For instance, prior to the budget, retail price of Gold Leaf, manufactured by Pakistan Tobacco Company, was an all inclusive Rs 28.55. Today it is retailing for Rs 34 per pack as the company has resorted to an unannounced price increase. Few know that the new price is Rs 31.98 per pack. Gold Leaf is the most expensive locally produced brand which is the bread and butter of PTC. In terms of quality it represents over 28 per cent of total PTC production volume while in terms of sales it contributes 55 per cent to total revenue of the company.

Naveed Aftab Ahmed of the Corporate and Regulatory Affairs department of PTC denied that the company has to do anything with the rampant over-charging. However, a relevant question is why it is taking so long for the company to come up with the packs which depict new prices.

Naveed said, defending the recent price increase, that they were imperative to enhance the declining profitability of the company which has sustained loss during last four years. He blamed the incessant currency devaluation, rising prices of such raw materials as cigarette paper, acetate tow used in filter, the rising production costs and a rising domestic inflation for the losses.

He defended the increase in cigarette prices, particularly Gold Leaf, saying that it still does not cover the inflation. "In real terms, there has no increase in the prices of cigarettes which is evident from 38 per cent increase in the price of Gold Leaf during the last five years which translates into an annual increase of just 6.75 per cent which is lower than the comparative inflation rates," he added.

Industry sources put the annual cigarette market in Pakistan at 55 billion cigarette sticks. The three cigarette manufacturers in the organized sector; PTC and Lakson Tobacco Company and Premier Tobacco Company (the amalgamation of the last two took place on January 1, 1997 when Lakson took over Premier) share among themselves about 90 per cent share of the market while the rest of the demand is met by a number of manufacturers in the unorganized sector.

While the cigarette manufacturers have found it fit to increase the prices under the cover of budget the government keeps on losing millions in revenues due to massive counterfeit trade and smuggling of cigarettes. Pakistani markets are flooded with counterfeits of Gold Leaf, the premier brand manufactured by the PTC as well as Red & White, the best selling medium-priced brand of Lakson Tobacco. Legal importers are also competing against smuggled products. Sources in the PTC told PAGE that the Company is aware of the counterfeits of its imported ‘Benson & Hedges’, a premium priced brand, but is helpless to do anything about it.