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Reduction of taxes on cigarettes dangerous: health ministry

April 05, 2018

ISLAMABAD: The Ministry of National Health Services, Regulations and Coordination has strongly recommended the Federal Board of Revenue (FBR) not to continue the policy of decreasing taxes on tobacco products at the costs of millions of Pakistanis.

The ministry has rather requested the FBR to do away with the strange and complex taxation on tobacco products introduced last year which introduced a third tier taxation in imposition of Federal Excise Duty and as a result, the prices of cigarettes were drastically reduced with lower taxes which ultimately enhanced their usage. The State Bank of Pakistan’s report quoted by the ministry in their communication with the FBR says that from July to October 2017, cigarette production increased from 11.48 billion sticks to 19.66 billion sticks which is about 71 percent growth in local cigarette production that had to be consumed locally.

Reportedly there are over 25 million tobacco consumers in Pakistan including 10 million cigarette smokers, resulting in deaths of above 100,000 people every year due to tobacco consumption and around 1,200 teenager start smoking every day. With the introduction of tax cuts on cigarettes especially for the multinational companies, use of cigarettes increased drastically. Pakistan is a signatory to World Health Organisation’s Framework Convention on Tobacco Control 2004 where dozens of countries have joined hands to make it difficult for non-smokers to start smoking and one step was to introduce high taxes to make cigarettes out of the reach of people, but the reverse happened in Pakistan during the current fiscal year.

In a letter written by Ministry of National Health Services, Regulations and Coordination Secretary to FBR chairman, the ministry has mentioned that the Senate Standing Committee on National Health services, Regulations and Coordination in its meeting held on 5th December 2017 took strong notice on the decrease in prices of cigarettes and strongly recommended to FBR to reconsider the policy. The committee has also directed the FBR to carry out a three-year audit of tobacco companies to determine whether they are involved in tax evasion and recommended to introduce the tracking and tracing system for tobacco companies to stop tax evasion.

The letter states, “Tobacco taxes that translate into price increases are considered the single most effective option for reducing tobacco use and increasing revenues. Higher tobacco taxes save money by reducing tobacco-related health care costs. According to WHO study, a 10 percent increase in tobacco prices will reduce consumption up to 8 percent in a low and middle-income countries.”

The FBR has been told by the health ministry that prior to budget 2017-18 the ministry proposed to tax the lower slab of all brands of cigarettes @ Rs44 per pack of 20 cigarettes and the proposal was based on a research study on tobacco taxation in Pakistan jointly conducted by FBR, World Bank, University of Toronto, Johns Hopkin University, University Of Illinois at Chicago and Beaconhouse National University. According to the study, a uniform specific excise tax that accounts for Rs44 per pack of 20 cigarettes could reduce number of smokers by 13.2 percent, increase tax revenues by Rs39.5 billion, leading to reduction of 0.65 million premature deaths caused by smoking among current smokers. While also preventing 2.55 million youth from taking up smoking. In addition to above this ministry also requested the Ministry of Finance/FBR to take enforcement measures to curb illicit trade in tobacco products.

“ln Finance Act 2017 a new slab with reduction in FED (i.e. Rs16) was created. According to FBR the third tier was introduced to tackle the menace of illicit non-duty paid cigarettes, besides significant growth in revenues was also expected. The committee was told by the FBR that by introducing 3rd tier overall net payment of sale tax and federal excise duty by legitimate cigarette industry was increased by 11 percent from Rs20,202 million and to Rs22,623 million (from July-November 2017)”, Secretary MNHSR&C has mentioned.

The letter further adds that the ministry has evaluated the relevant impact of current tax structures on the revenue growth and growth in production of cigarettes. According to FBR, during first 5 months of FY 2017-18, there is about 11 percent growth in cigarettes tax revenues from 20,404 million to 22623 million. Parallel to this, according to State Bank of Pakistan, cigarette production during July-October 2017 has been increased from 11.48 billion sticks to 19.66 billion sticks. This is about 71 percent growth in local cigarette production. “Even if we consider that the cigarette production growth has fully captured the illicit, non-duty paid cigarettes market and illicit trade in tobacco products has fully been eliminated, still there is about 49 percent growth in local cigarette production. This growth in local cigarette production will definitely increase cigarette consumption in the country as these cigarettes will be sold locally. Resultantly, tobacco related deaths in the country will be increased in addition to increase in tobacco-related health care cost. Foregoing in view, it is requested to reconsider the policy of reducing cigarette prices and withdraw the 3rd slab created in Finance Act 2017, immediately to save lives of people of Pakistan. Moreover to curb illicit trade in tobacco products, the tracking and tracing system for tobacco companies should be implemented on priority basis”, the letter concludes.