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Tax relief for tobacco industry perturbs many


April 21, 2019

LAHORE: The tobacco sector contributes significantly to the national exchequer, but it is directly responsible for a huge burden on the national economy.

An international organisation ATLAS says Pakistan loses 140 billion per year as health cost due to tobacco use. Tobacco is also responsible for some 175,000 deaths in Pakistan each year.

The tobacco sector does not have a major impact on the economy, but considering the tens of billions of rupees generated by this sector as revenues, the government authorities are inclined towards providing relief to it.

According to estimates, around 90 percent of the market share belongs to two multinational cigarette manufacturing companies - Pakistan Tobacco Company (PTC) which is part of British American Tobacco (BAT) and Phillip Morris.

For this very reason, these companies have a clout of influential people around them who can guard their interests whenever needed. They have resources that they mobilise at times to build a narrative that the influential quarters buy.

The world over there is an increasing realisation that smoking must not be tolerated, because it is injurious to health and may even prove fatal. Therefore, it must be discouraged through different means, including imposition of ban on their advertisements and heavy taxes on tobacco products. This makes the product expensive and reduces demand.

However, the case in Pakistan is totally opposite. Here the Federal Board of Revenue (FBR) revised the two-tier tax structure applicable on cigarettes and introduced a new low-tax ‘third tier’.

This has helped multinationals boost their sales by shifting heavy volumes of their production to third-tier category, where government’s tax rates are extremely low. A recent study shows that 88 percent production of cigarette companies comprises the one with lowest tax category.

The argument given in favour of this decision was that people were shifting to smuggled and local non-duty paid cigarettes due to high prices of legally produced cigarettes. So, it would help capture the market as well as bring more revenue to the state.

Contrary to this claim, the projected raise in tax collection from cigarette sales could not be realised. In 2015-16, FBR had collected Rs114 billion taxes from the tobacco industry, but after the introduction of the third slab, this figure came down to Rs83 billion.

As cited above, a major reason for this trend is that cigarette companies have started producing high volumes of low-cost cigarettes and less of costly ones just to enjoy benefits of the third tier.

Against this backdrop, there is a need to set a course for the future. The problem with the government is that on one hand it has become addicted to huge revenue streams coming from the tobacco industry, and on the other it has committed to the world that it will take concrete measures to discourage smoking and production of tobacco products in the country.

Experts suggest re-introduction of two-tier tax structure and doing away with the third tier. This, they say, will also decrease the instance of smoking as low cost cigarettes with low tax rate will not be a part of these companies’ product range.

They also believe that increasing taxes on cigarettes will increase revenues, because this product has an inelastic demand, meaning its consumers do not drastically cut down consumption due to a rise in price. So, the sale is affected slightly, but revenues keep on increasing.

The time to take this decision is ripe because different government entities are calling for it. For example, the Ministry of National Health Services, Regulations and Coordination has stated that they had opposed the introduction of third tier in the Federal Excise Act on cigarettes because it was in contradiction with the guidelines of the World Health Organisation (WHO) Framework Convention on Tobacco Control (FCTC) to which Pakistan is a signatory. FCTC wants states to keep on increasing taxes on the tobacco industry.

The ministry has categorically stated that the third tier introduced by FBR had substantially increased smoking in the country without bringing any financial benefits to the state. Similarly, a senate committee probing cigarette industry affairs has found faults with the existing tax structure for cigarette industry and termed it reason for increased sales of cigarettes in the country.

Furthermore, the federal government wants to impose a ‘sin tax’, but has not yet done that. The resistance mainly comes from FBR, which claims high taxes lead to flourishing of illicit trade.

But illicit trade has no correlation with taxes. It is an administrative issue that needs administrative measures.

Isn’t FBR responsible for monitoring cigarette manufacturing units and making them pay taxes and checking smuggling and sale of counterfeit cigarettes in the country? If yes, is it justifiable on its part to take measures that promote smoking rather than increasing its own efficiency to curb illicit trade?