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November 28, 2020

Illegal cigarettes trade hurting economic growth

Islamabad

November 28, 2020

Islamabad : Recent reports of anti-tobacco sector pushing towards the implementation of health tax to be levied on the tobacco industry are bound to have a severe negative impact on the tax collection from the tobacco sector in Pakistan.

According to the world-renowned research institute, Oxford Economics, the tax evaded cigarette sector share stands at 37.6% currently, primarily due to a 93% excise rate increase in the past 18 months, which did not cause any decrease in tobacco consumption in the country. Due to this unprecedented increase in taxation, we have seen the tax evaded cigarette sector rise from 33% to 37% causing the government to incur losses of more than Rs70 billion during this period.

The undocumented sector takes immense advantage of increased taxes on the regularized tobacco sector as they have been selling a 20-cigarette pack at Rs25-40 for the past 8 years and will continue to sell at the same price point even if health tax is levied. The price point at where these cigarettes are being sold are below the minimum applicable taxes of Rs44.25 and below the minimum price of Rs62.75 per pack set by the government; a violation that till date anti-tobacco lobby has failed to acknowledge.

According to the statement of the Ministry of Finance, 3 million jobs have been lost due to the novel coronavirus; poverty levels have increased more than 33% over the past year. Inflation levels which have reached double figures have stretched consumer spending power, far-reaching impacts that may also lead the consumers to shift to tax-evading cigarette brands.

Levying health tax on regularised cigarettes will not help achieve the desired objectives and instead would cause a downshift by the consumers to tax evading cigarette brands. According to PricewaterhouseCoopers (PwC), one of the worlds-leading consulting firm, a shift of consumption towards duty not paid cigarettes will likely cause the government to fail to meet revenue targets from the tobacco sector.

The 2019 policy change of removing the 3-tier tax system on tobacco sector has led to a loss of 6.5% in government revenues from them and boosted market share of local non-tax paying tobacco companies. Any increase in FED or other duties not only leads to a loss in the government exchequer revenue but also shifts the consumer to low-quality tax evaded cigarettes which are more harmful to health. Thus, the government ends up achieving neither the fiscal nor the health agenda of the country.