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An illicit argument


May 2, 2019

Smoking is injurious to health and leads to more than seven million deaths globally in a year. Even cigarette manufacturing companies acknowledge this fact and claim they do not target potential smokers. What they say is that they cater only to the needs of existing smokers and nothing else.

But what is actually happening is that they regularly lobby with respective governments to get the taxes on tobacco products reduced on different grounds and mostly succeed in their endeavours. Their argument is that the high taxation on tobacco products makes them expensive, so smokers are tempted to buy smuggled, counterfeit and non-custom paid cigarettes that are comparatively cheap. But the troubling fact is that the low prices due to low taxes encourage the youth and those on low incomes to start smoking. Those already smoking can buy more cigarettes than before and hence increase their consumption.

These companies also try to convince their respective governments that due to this illicit trade they are deprived of huge revenues they would have earned from formal trade. Quite understandably, governments are a bit confused. On the one hand, they do not want to lose huge revenue streams coming from the cigarettes industry, and on the other they have to fulfill their international obligations regarding tobacco control.

The same is the situation in Pakistan where the leading cigarette manufacturing companies, especially the Pakistan Tobacco Company (PTC) and Philip Morris International (PMI), keep on asserting that high tobacco product taxes lead to tax evasion and proliferation of illicit tobacco trade in the country. Their efforts and lobbying increase when the announcement of the annual budget nears and they fear the imposition of higher taxes in compliance with the provisions of the World Health Organisation’s (WHO’s) Framework Convention on Tobacco Control (FCTC).

At this point, they call for keeping these taxes low and their argument is bought readily by the Federal Board of Revenue (FBR) which is responsible for curbing smuggling, production of counterfeit cigarettes and evasion of government taxes. This act on the part of the FBR is essentially like conceding defeat in its work against players of illicit trade, and looking at someone other than itself to find out a solution.

The question here is whether the FBR should be allowed to shun its responsibility and not be held accountable for its failure to curb such illicit trade. It is also worth exploring that how much the lowering of taxes has helped in increasing tax revenues without increasing the instance of smoking.

The evidence from countries with strong and efficient enforcement mechanisms shows that non-tax factors – including weak governance, high levels of corruption, poor government commitment to tackling illicit tobacco, ineffective customs and tax administration, and informal distribution channels for tobacco products – are the main reasons for revenue shortfalls in this sector. So, the best ways to maintain or increase revenue collection levels are to improve governance, make the tax collection machinery efficient and effective and end corruption. Reduction in tobacco taxes on the pressure of the cigarette industry has turned out to be counter-productive – especially in Pakistan, where revenues have decreased after the grant of tax concessions to the cigarettes industry.

Against this backdrop, there is an ever-increasing realization among the stakeholders, including anti-tobacco campaigners, that the pretext of the illegal trade is largely a lobbying tool used by the tobacco industry to get favourable taxation policies approved.

The leading cigarette companies in Pakistan have also been criticized for sharing fabricated and exaggerated figures regarding the illicit cigarette trade. These figures were reached during research exercises carried out by organizations sponsored by the tobacco industry in Pakistan. Even now the cigarette company PMI is sponsoring ads in the media against illegal trade and smuggling in different commodities, especially cigarettes. These ads refer to data provided on a sponsored website which has a logo of the PMI on every page. According to recent reports, representatives of cigarette manufacturing companies have met the prime minister and donated Rs5 million to the dams fund. This is totally in violation of the international convention on tobacco control.

In this context, it becomes imperative to challenge this narrative that has adversely hit the anti-tobacco campaigns in the country. To start with, one must challenge the figure of 40 percent of the whole cigarette trade in the country being illicit. This figure is given by the cigarette industry and bought readily by the FBR. The question here is: how is this possible when the prices of cigarettes have come down drastically after the introduction of concessionary third-tier taxation formula in Pakistan? Does it make sense to smuggle cigarettes from abroad and give bribes to officials when the prices of legally produced cigarettes are the lowest in the region? Even if this is the case, there is no justification in making cigarettes cheap and accessible to more and more people including the youth. How many tax officials have been suspended, transferred or punished for not being able to curb or curtail the illicit trade in tobacco products?

The international community does have concern about the impacts of illicit cigarette trade, which is why the FCTC calls for the establishment of a global tracking and tracing regime. This helps check illicit trade and forms a mechanism under which states cooperate with each other. The FCTC is strictly against giving tax incentives to the cigarette industry on any ground whatsoever.

The need of the time is for Pakistan's political leadership, health ministry, finance ministry, FBR etc together come up with a policy that helps maintain revenue streams and meet the country’s goals regarding tobacco control. It would be prudent for them to listen to the counter version as well and reduce dependence on research sponsored by the cigarettes industry.

The 'Study to Assess the Volume of Illicit Cigarette Brands in Pakistan' provides this version. This study carried out by the Pakistan National Heart Association (PANAH) and the Human Development Foundation (HDF) challenges the claim of more than 40 percent cigarette sales being spurious. It puts this number to be not more than nine percent and claims to have done extensive studies and surveys to reach this conclusion. Researchers and surveyors even collected used packs and wrappers during this exercise.

In light of these findings, one can say that the third tier of taxation introduced by the FBR to give tax relief to cigarette companies was not justified, caused the exchequer loss of billions of rupees and led to increased tobacco consumption in the country. The least the government can do is to withdraw this concession in this year’s budget.

The writer is a staffer at The News.

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