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Higher taxes will increase cigarette consumption


June 5, 2019

ISLAMABAD: The price differential between duty paid cigarettes and illicit products would considerably increase after imposition of Health Tax on cigarettes in the upcoming budget.

The taxation measures to be taken in coming budget on tobacco industry would have following repercussions: People will shift from legal brands of cigarettes to illicit due to increase in price difference between duty paid and non-duty paid cigarettes, major increase in smuggling due to higher prices of documented brands.

Violations of health laws and warnings by the illicit cigarettes manufacturers will continue to go unchecked by authorities giving them further edge over duty paid cigarettes. The component of local tax evasion on cigarettes is already very high and any move to impose Sin Tax would further encourage tax evasion at domestic stage. The proposed 'Sin Tax' on tobacco industry would result in production of local tax-evaded cigarettes and increase in tax evasion in tobacco sector.

The Ministry of National Health Services, Regulations and Coordination with the help of the FBR will have to take appropriate measures to check illicit cigarettes in Pakistan, reflecting serious violations of health laws/rules and regulations by the 'illicit' industry.

The alarming figures of consumption of illicit cigarettes on daily basis cannot be ignored by the Health Ministry. These illicit cigarettes mainly include non-duty paid cheap cigarettes whose sale is openly violating all kinds of rules and regulations of the Ministry of Health.

The situation would become worst after imposition of Health Tax and additional FED from July 1, 2019.

As per Oxford Economics Study, Pakistan ranks 1st in illicit trade of cigarettes in Asia, with a total volume of 326 billion illicit cigarettes consumed in 2017. The primary reason for existence of illicit manufactures is the tax-driven price differential between legal and illicit brands, which currently stands at 130%.

The documented tobacco industry is repeatedly urging the government to adopt a balanced fiscal approach with effective enforcement measures to curtail the sale of tax-evaded cigarettes, which would generate revenue over and above Rs 115 billion by the end of 2018-19.

The documented tobacco industry has estimated that the revenue collection is expected to cross Rs115 billion by the end of 2018-19 and will increase further if the government retains this excise structure.

The lowest tier should remain intact in coming budget to provide an opportunity to the local units to come into the tax net and enforcement efforts need to be geared up to avoid losses.

The FBR has acknowledged the fact that two multinational cigarette manufacturing companies would contribute over Rs115 billion to the FBR by the end of 2018-19, reflecting contribution of record revenue from documented tobacco sector.

However, the most dangerous aspect in consumption of illicit cigarettes is the blatant violations of the health regulations by the local manufacturers of Non tax paid cigarettes as well as non-payment of applicable rates of Federal Excise Duty under FED slabs notified by the FBR.

Ministry of Health had proposed imposition of 'Sin Tax' on tobacco industry and beverages to generate additional revenue. At the same time, apparently there is no system in the Health Ministry to check or control or monitor the manufacturers, suppliers, sellers and impact on consumers of illicit production of cigarettes. Moreover, in the absence of authentic data on illicit trade consumption of cheap cigarettes in the country, this huge consumption has not only destroyed the documented industry but also serious health problems for those consuming illicit cigarettes in Pakistan.

Health tax is another form of excise tax which will again increase prices of legitimate brands but have no effect on the 33 percent illicit market that will continue to sell even below the minimum price in the country. Therefore, the enforcement against this black market is necessary and coordination amongst various departments is necessary to take inputs and industry on board.

Furthermore these illicit cigarettes violate other health laws such as advertising, targeting youth, giving gifts, incentives and lucky draws, all of which are prohibited under the health ministry laws.

Currently in Pakistan, tax increases are counterproductive in achieving the government's revenue and health objectives since they are encouraging people to smoke cheaper cigarettes that are more affordable. This results in attracting the youth to initiate smoking due to cheap prices as 1 cigarette is available for Rs1.

The experts have apprehended that the massive raise in taxes on tobacco would immediately result in increase in smuggling and business of non-duty paid cigarettes in 2019-20. Without realizing the fact that over-burdening any sector with additional taxation would be a disaster for that sector, the government is mulling to impose Health Tax and additional FED on tobacco and beverages.