Carreras calls for Gov't to review SCT on cigarettes

Observer senior reporter

Monday, August 06, 2018

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MANAGING director of Carreras Limited Marcus Steele says the Government must review the special consumption tax on cigarettes if it wants to cripple the illegal trade and stem the estimated $5-billion loss to its own coffers.

Steele is again making an appeal to the Administration to reduce the $17-per-stick tax on cigarettes, as not only is the level of taxation forcing prices to remain high, but it is also fuelling the illicit trade, which is on the rise.

“I'm of the view that the taxation is too high. If possible, apart from closing the loopholes at the port, they may have to look at the taxation on tobacco...they may want to reduce that taxation from $17 a stick so that the legal market can reduce the price of the cigarettes, so that the market can get closer to where it was two years ago in terms of pricing,” Steele stated at a Jamaica Observer Press Club forum last Thursday.

He explained that with the cost of a pack of cigarettes now at about $500, there are players who are consistently selling at below that, which suggests that points are being made from bringing in the product illegally and dodging taxes.

“If you're selling cigarettes for less than that, it is very clear that you're not paying any taxes or you've found a way to pay lower taxes — which is not in accordance with the law,” he said.

Steele said this must be addressed as the illicit trade not only jeopardises the market position and profits of legal traders, but also eats into the Government's own revenues.

He noted that the Government of Jamaica is losing approximately $5 billion per annum to the illicit trade.

“That's a lot of money,” he remarked, pointing out that he had in fact pointed out to the former finance minister that increased taxation could erode projected revenues.

“I said to him, based on the experiences that we have seen, you are not going to make that. As a matter of fact, you're putting at risk the taxation that you already have. He levied nevertheless and what happened? Exactly what I said — he did not collect the $870 million (in taxes) and he lost almost a billion. The Government collected almost a billion dollars less than before the excise increase — where I come from that's bad policy.”

According to Steele, taxation is the cause of the illicit trade problem which started when the levy moved to over $10 per cigarette. He said the tax now accounts for about half the price of one cigarette.

“If you look around the world there are markets that don't have any illicit trade problems (because) remember the profit from the illicit trade is the taxation. Where they make the money is the tax that they are not paying and selling the cigarette at those prices, so they can undercut any legal trader easily. Ideally what we would want is to remove that level of profitability. These guys are going to find a way around it, so that is what you need to do. Remove the incentive for these guys to continue to try to go and bring in these cigarettes,” he outlined.

The managing director said there is some momentum now amongst the relevant government ministries and agencies to tackle the problem, but he is of the view that the technocrats who develop policy do not seem to have a full grasp of the issues.

“So we spend a lot of time trying to educate and share with them,” he said.

Steele said another issue is that agencies of government tend to be operating in isolation.

“We need to get them working together — the police, JIPO (the Jamaica Intellectual Property Office), Customs, the Ministry of Finance — all working together (because) somehow they have a very silo view of their individual operations,” he said.

He said the problem should not be viewed just as a cigarette issue, but that the Government and the country as a whole must be concerned that any product could get into the island through the back door.

“Hopefully they see the need now to sit down as a team to solve this, not only because we are losing revenue, but they ought to be concerned as citizens of this country that we do have a supply chain that can cause a container to leave the wharf undetected. I have a problem with that; it could be anything (and) they should be seriously concerned about that,” he stated.

Meanwhile he said Carreras, which has 98 per cent of the tobacco market, has been forced to find ways to mitigate against losses in the face of the boldness of the illicit traders, which has escalated over the past 10 years.

He disclosed that for the 2018 financial period, the company had sustained an eight per cent loss.

“We had to rationalise a lot of things, we had to look at rationalising the way we even sell cigarettes. For example, three years ago we did our route to market rationalisation, where we saved over $100 million just by converting from vans to bikes,” he said.

Steele emphasised that the company has taken various other approaches to improve efficiency and production, but at the end of the day the illegal traders are getting past the port, and profits are being hamstrung by taxes.

“We did a lot of cost management initiatives but that can save only so much and no more — you have to protect the top line. We did a lot of investment in our brands, trying to reassure consumers that there is a good reason to stay with this brand. We had to do a lot of things to mitigate the profit drop,” he said.

According to a study conducted by the company, over 50 per cent of the cigarettes consumed in Kingston are illicit, followed by St James at 28.5 per cent, St Ann at approximately 29 per cent, and St Catherine 18.6 per cent.

“So we have a problem. The major towns are infested with the illicit (cigarettes). When you talk with a consumer they are looking for a smoke that they can afford. To be honest, they are forced now to look elsewhere. So they (the Government) have created the demand and there is someone illegally supplying that demand,” Steele stated.

He noted that in the past 20 years Carreras has only independently brought one price increase to the market.

“All our other increases have been driven by taxation. It's very difficult if almost 50 per cent of the price is taxation,” he explained.

Steele said Carreras has had many discussions with governments over the years and is now seeking to arrange a meeting with the current finance minister Dr Nigel Clarke to examine the issues.

He stressed that once the illicit traders become accustomed to their ill-gotten gains, they will maintain a stranglehold on the market.

“That's why we must do everything in our power to try to prevent it from happening, because the moment it gets to that stage it's very difficult to get to back — exceptionally difficult,” he stressed.

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