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Payvand Iran News ...
10/23/10 Bookmark and Share
Cigarettes smuggle: A loss imposed on national economy
Source: Persian (or Farsi) Mellat-e Ma daily, 19 October 2010 P.5

Before 1382, when private companies had yet not been legally operating in the tobacco industry, 70% of the market was dominated by smuggled cigarettes. After the entrance of private companies and better regulation of the tobacco industry, the rate of illicit trade gradually fell to under 20%. The annual profit of ITC and the private sector between 1382 and 1384 on the one hand, and the government's revenues from this sector on the other, were indicative of this reality.

After the implementation of the Comprehensive Plan for National Control and Combat against Tobacco (CPNCCAT) which is based on World Health Organization's (WHO) FCTC (Framework Convention for Tobacco Control), smuggled products started hitting the Iranian market harder. Management of the Iran Tobacco Company (ITC) changed several times because the dominating mindset was that the high illicit trade rate was only a management issue.

A look at the situation in other countries indicates that the repeated increase in illicit trade of tobacco in Iran is not necessarily a management issue and solely ITC's responsibility: Iran is not the only country in which higher taxes and insensible regulation have played into the hands of smugglers. As correctly pointed out by ITC chairman, smuggling rate of cigarettes stands at 25% in the UK. One Master Case (10,000 cigarettes) of premium price products, bought in retail in Ukraine costs £ 220. It is sold in UK at 50% of UK Recommended Retail Price. This means:

- Income £ 1,250

- Gross Margin £ 1,030

- Return on Investment 473% per week

- Net Profit / White van £ 52,000

- Net profit / Lorry £ 1 million

In the UK, the cost of tobacco smuggling to the exchequer was estimated by Her Majesty's Revenue and Customs (HMRC) to run to £ 2.6bn in the 2006/7 financial year, while losses for retailers, wholesalers and distributors are thought to run to £ 230 million annually and £ 191million for the manufacturers.

Considering the fact that the UK has been on the forefront of FCTC and the anti-tobacco combat and that it is an island, one should not be all too surprised about the situation in Iran. Iran has one of the world's largest number of neighbors (Iran has 15 neighbors, water and land borders).

Conclusion:

Part of the illicit trade of tobacco is due to the industry's paradoxical nature. On the one hand, governments rightly believe that tobacco poses a serious threat to public health. On the other, governments allow legal tobacco companies to operate for two reasons: 1) The revenue from legal tobacco trade is huge and 2) if legal products are banned, illegal products will easily take over. This would pose an even more serious threat to public health.

In Iran, it is not much different than anywhere else. If an influential European island state like the UK cannot stop smuggling of cigarettes into its borders, how is Iran with its highly porous borders and 15 neighbors supposed to fight back this phenomenon?

If tobacco is accepted as a legitimate industry and commodity, governments must take responsibility and make sure its regulation does not add to the accepted health damage that tobacco is already causing: This means whatever policies caused illicit trade of tobacco to go down from 70% of the market to below 20%, must return again.

Iran's own version of anti-tobacco law (CPNCCAT) should be adopted to WHO's FCTC only to an extent that it will not increase the rate of smuggled tobacco products. So far, a blind compliance has not resulted in lower rates of illicit trade, but vice versa. Inability to control the influx of smuggled stock results in huge annual losses both to the government and the industry (See table for detail). At the same time business for smugglers has never been more lucrative.

Why are we where we are now?

One must keep in mind that international organizations such as WHO, WTO, IMF and World Bank are known for their highly bureaucratic structure. They are also known for working towards one-size fit all solutions. IMF and World Bank's inflation-focused policies in Russia and many other countries such as in Latin America are indicative of the disaster they brought to the people of those countries for adopting the same policy for countries with different economic and cultural realities.

WHO's FCTC is also a similar case in point. When doctors and lung specialist decide over criminal concepts such as illicit trade, one could not expect a better outcome than the rising rate of illicit trade in Iran's tobacco industry among many other countries. Unfortunately, Iran's Ministry of Health also has fallen into this trap and is fully disregarding the implication of its anti-tobacco policies.

Figures on how much capital is annually spent on patients with lung cancer might be true, but they are cliche and hardly contribute to the combat against tobacco smuggling in Iran.

As for now, it appears that the government is losing huge revenues from cigarettes for the following reasons:

- The government assumes that MoH's solution is the only right way because it is based on WHO's agenda.

- MoH is not prepared to think outside the FCTC-box, as its political agenda requires it to.

- The distrust of the tobacco industry is ruling out the possibility that the legal tobacco industry could have a common interest with the government or even with the Ministry of Health, namely the eradication of illicit trade which is destroying its legal business.

What to do?

It appears that responsible organizations have not been successful in eradicating the smuggling networks and bringing them to justice. This, however, should not mean that the government agencies should continue their focus on policies that will even facilitate the situation for smugglers.

Experience shows that since the implementation of CPNCCAT in Iran, the rate of smuggling has gone up. This article does not conclude that just because the two phenomena (implementation of the law and rise in the rate of illicit trade) take place simultaneously, they are interrelated. This article brings evidence that they are interrelated. As a matter of fact, the current anti-tobacco law's intention regarding combating smuggling would have been successful if the control over smuggling had been tighter.

But how is the rate of smuggled cigarettes supposed to go down as long as:

The law is not countering smugglers effectively. Limited number of seizures of smuggled cigarettes. Smuggled cigarettes are not collected from shops.

Tax on tobacco makes it impossible for legal products to survive in the long run, if smuggling of tobacco will not stop.

- The graphical health warnings (GHW) create an additional incentive for the consumer to buy smuggled products without GHW.

All said, if the status quo continues, by 1391, at least 80% of the market will be dominated by smugglers. In that case, none of the current private manufacturers will be able to continue their business in Iran. They will probably withdraw from Iran and their products will be entirely smuggled into Iran like before 1381.

In this case,

- More jobs will be lost,

Government's earnings from tobacco will decrease to near zero,

- Iran's underground economy will flourish.

- Ministry of Health's income will decrease drastically.

- People will be smoking predominantly smuggled tobacco which could be even more harmful than legally manufactured or imported cigarettes.

- Incentive for foreign direct investment will go down.

- Smuggled products will take over as WHO's disillusionment with Iran's Ministry of Health will increase.

 

The questions that must be answered are:

- Is it more important to look good at WHO, or reduce consumption nationwide?

- Is Ministry of Health reducing consumption or is it only playing with statistics, while the smugglers are getting richer, as government's revenue is decreasing?

Win-Win solution:

This said, the following strategy is expected to contribute to decrease of illicit trade of tobacco without incurring any loss on the government as it will not increase consumption:

1. No tax factor should be removed under the pretext of fighting smuggling. At least not as long as other strategies have been tried. Tax cut is probably what all tobacco companies, including ITC, will be arguing under the pretext of high smuggling rates. The government is, however, expected to show readiness to change the currently lucrative situation for the smugglers without losing anything.

2. Smuggled cigarettes should be collected from retailer shops completely.

3. The government should immediately require ITC to replace GHWs from all legally imported and manufactured cigarettes and replace them with formerly Ministry of Health-approved text warnings. This will give legal products an immediate competitive advantage vis-a-vis illegal products. The impact of this move must be assessed after few months.

4. If effective, legal ground must be paved for realistic change with regards to CPNCCAT. Ministry of Health must start reviewing the CPNCCAT along with ITC and other tobacco stakeholders such as the Majles Commission for Health in order to amend the law realistically based on today's realities. This will give the industry the chance to amend the law in order to make it more efficient and enforceable.

It is important to note that this decision will not increase consumption as the shift will be only from illegal to legal products. One should remember that CPNCCAT was drafted under extreme political pressures and without any experience in some of the 20 articles raised in the law. Few years down the line, all stakeholders know more and have more experience in this sector.

Iranian anti-tobacco society should also stop blindly following FCTC activists understanding they have their own political agenda irrespective of what the outcome in Iranian tobacco market will be.

FCTC officials, similar to managers in many companies, receive additional bonuses for achieving annual targets. This is irrespective of the results of policies implemented in a specific country. Bonuses and incentive schemes are based on number of countries that comply with FCTC and follow agenda of the Conference of the Parties and not the possible distortions that these laws might have in store in those countries.

The government should focus on results and not policies drafted by UN and its agency's officials.

The following table indicates

- The revenues various organizations received from sales of only legally imported cigarettes in 2008 & 2009,

- The loss they suffered between 2008 & 2009 as a result of increasing smuggled tobacco.

- The retail selling price 1,500 Toman is believed to be a realistic average.

1 Master case

Receiving body

@ 12 billion sticks/year (1,200,000 MC) imported (2009)

@ 21 billion sticks/year (2,100,000 MC) imported (2008)

Loss to body from 2008 to 2009

40% health tax CIF

56,900 Toman

MoH 40%, RO 60%

68.28 billion Toman

119.49 billion Toman

51.21 billion Toman

Customs duty 4% (CIF)

5,690 Toman

Customs Organization

6.82 billion Toman

11.94 billion Toman

5.12 billion Toman

20% Tax (FOB)

22,400 Toman

Treasury

26.88 billion Toman

47.04 billion Toman

20.16 billion Toman

35 Rial/stick commercial benefit

35,000

Toman

Treasury

42 billion Toman

73.5 billion Toman

31.5 billion Toman

Monopoly fee

50,000 Toman (average fee/MC)

ITC

60 billion Toman

105 billion Toman

45 billion Toman

Hologram outer

8 Euros= 11,200 Toman

ITC

13.44 billion Toman

23.52 billion Toman

10.08 billion Toman

VAT & Municipality tax

28,728

Toman

Municipality

34.5 billion Toman

60.32 billion Toman

25.82 billion Toman

Income tax

(MC of 1,500 T product)

56,250 Toman

Ministry of Finance

67.5 billion Toman

118.1 billion Toman

50.6 billion Toman

Total

266,168 Toman

319.42 billion Toman

558.9 billion Toman

239.48 billion Toman

... Payvand News - 10/23/10 ... --


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