Mon | Jan 21, 2019

Carreras estimates illicit cigarette trade as a $5b business

Published:Friday | January 19, 2018 | 12:00 AMHuntley Medley
Marcus Steele, Managing Director of Carreras Limited.
This June 2013 Gleaner photo shows a billboard advertising Matterhorn cigarettes, a core brand traded by Carreras Limited. The company, which dominates the market, says illicit traders have now cornered 30 per cent of the market as taxes are piled on cigarettes.

Last year, the Jamaican Government raised the tax on cigarettes from $14 to $17 per stick, with the intent of raising $876 million of additional tobacco revenue for the Treasury.

But the company, whose products would have borne the lion's share of that tax haul, is suggesting the State might finally have overplayed its hand.

Managing Director of Carreras Marcus Steele said that with three months of revenue collection still to go, instead of additional inflows, the tax authorities have collected $1 billion less revenue from the so-called 'sin tax' than the previous year when the levy was at $14 per stick, the upshot of which is that its budget is now facing a shortfall of $1.8 billion from smokers.

This situation has arisen, he said, because the excise tax is dampening sales of legitimate tobacco products - which are taxed at the ports entry - and feeding customers to illicit traders whose cigarettes evade Customs.

By Steele's reckoning, the illegal cigarette trade is now a $5-billion business that is still growing, and accounts for roughly 30 per cent of the market for tobacco products. Carreras itself makes nearly three times that in revenue.

The Ministry of Finance & Planning has not responded to a Financial Gleaner request made over a week ago for confirmation of the revenue fall-off and what actions the Government is considering, but the Carreras boss says the correct state response should be a full or partial rollback of the tobacco tax.

"I want to be bold enough to say the Government may want to think of rolling back some or all of it, if they wish to reverse the trend, because it is all about pricing," he said.

Illicit traders benefiting

Steele said the illicit traders counterfeit Carreras' products and undersell the listed Jamaican company because those products, as well as some legitimate brands not meant for the Jamaican market, are not paying government duties.

"These products were not made for the Jamaican market. They were not declared at the ports. They are not manufactured in Jamaica. They pay zero tax, but they are being consumed and the Government gets nothing," Steele said of the illicit products, the prevalence of which is picked up by the 'stick and pack' survey done by his company every three months.

Against a recommended stick price of $55 for Carreras' products, illicit cigarette brands are said to be selling for as low as $20 per stick.

Other brands on the market, that "purports to be legal," according to Steele, are also said to be selling for $300 to $400 per pack, whereas the minimum tax paid by Carreras on a pack of cigarettes is $420.

"So if you are selling cigarettes for less than $420, it means you are not paying any tax. These things have disrupted the supply chain, causing volumes to migrate," the Carreras boss charged.

"The taxation policy of the Government does not make any sense. If you are going to lose $1 billion [off what] you collected last year because of a tax, then it makes no sense," he insisted.

The current situation deja vu for Steele, who said he experienced the same evolution during oversight of Suriname on behalf of Carreras' parent company British American Tobacco Plc, when the illicit cigarette trade there mushroomed to 60 per cent of the market.

"The reason for that was the consistent and continuous increase in the level of taxation. So there is a direct correlation between high levels of taxation and the illicit trade," he said.

He also pointed to Panama, where he said a 100 per cent increase in excise charges delivered a commanding 70 per cent market share to illicit traders, up from 20 per cent before the tax hike.

Carreras maintains consistent dialogue with the Government on its taxation policy and its impacts, but is keen to talk with them some more.

"The Government has to start looking at the industry not as a source of closing budget gaps, but as a source to sustain revenue that they are collecting. This country cannot afford to lose money. We are always saying that we can't do things for social infrastructure, for housing for schools, for hospitals; yet still we implement a policy that makes us make less money for the Government. We have to change that," Steele said.

Carreras, whose core brands are Craven A and Matterhorn, gave up the manufacturing of cigarettes in 2005 and has since confined itself to trading.

In its financial year ending March 2017, Carreras earned revenue of $13.5 billion, from which it paid $5.9 billion in excise taxes. The year before that, sales amounted to $12 billion, from which it paid $5.1 billion in excise taxes.

The company, which maintains a healthy bottom line, typically passes on the consumption tax hikes to smokers through higher cigarette prices. The cigarette trader's annual profit spiked from $3 billion to $3.9 billion in 2017.