Economy, Domestic Economy

Countering Contraband Cigarettes

Countering Contraband Cigarettes Countering Contraband Cigarettes

Iran’s cigarette market is inundated with smuggled cigarettes due to enormous demand in the country for foreign brands as well as a ban imposed by the government on cigarette imports.

The steps taken by the government to crack down on cigarette smuggling has so far failed.

Finding solutions to tackle cigarette smuggling has been among the most controversial issues faced by different governments.

To clamp down on cigarette trafficking, Mohammadreza Nematzadeh, the minister of industry, mine and trade, has recently issued a license for legal import of 12 million Marlboro cigarettes – a decision that sparked criticism from a group of lawmakers lashing out at the official. The lawmakers argue that the brand is made by Philip Morris USA, a company suspected of having close ties with Israel, a staunch enemy of the Islamic Republic.

“Importing cigarettes is not legally banned and whatever the ministry has done is legal,” Deputy Minister Mojtaba Khosro-taj said later in response to the critics.

The minister dismissed the idea that the decision amounts to a state monopoly on cigarettes, as some critics claim. Nematzadeh said the license was issued to fight smugglers who pocket about 5 trillion rials (about $150 million at market exchange rate) every year.

The political aspect of the government’s decision aside, one may ask how effective it might be in actually curbing smuggling of cigarettes.

  Source of Revenue

A glimpse of the domestic market shows that the restrictions imposed on import of cigarettes have fueled smuggling, whereas authorities had hoped their measures would help protect the domestic cigarette industry.

From this point of view, the government’s latest decision seems rather reasonable. By legalizing cigarette imports, the government will be able to levy duties and tax on retailers and VAT on consumers. It can also fine those who violate import laws or evade paying taxes. Thus, the government will gain a new source of revenue.

Following the approval of the parliamentary Budget Integration Committee, the government, for the current fiscal year, levied a 20 percent tax on cigarette production, a 30 percent duty on joint production with foreign partners, and a 40 percent duty on imports. Given the 48 to 54 billion cigarettes Iranians smoke every year, according to the Statistics Center of Iran, the government is set to make a substantial earning from the duties it levies on producers, importers, and retailers. The government claims it plans to allocate the revenues to support domestic cigarette producers in a way that they will be able to compete with foreign rivals. As a result, officials argue, reliance on foreign products will reduce and smuggling will gradually be eradicated.

However, under the present circumstances, things may turn out differently, as high duties on imported cigarettes could translate into impediments to competitiveness. In actuality, the domestic cigarette industry is not able to compete with foreign brands. The industry barely struggles to compete with contraband, as the price of domestically produced cigarettes cannot be further reduced due to high costs.

With the 40 percent duties on imports, the total cost of imports will be higher in the mainstream market than the black market, which would encourage consumers to light up contraband cigarettes. In other words, the duties levied on imports may only protect domestic producers without curbing smuggling.

If duties on imports decrease, imported cigarettes will be cheaper in the market than those produced domestically. That would lead consumers to buy the higher quality foreign brands.