Wednesday January 26, 2022

Raise taxes, health and productivity, all at the same time!

January 05, 2022
Raise taxes, health and productivity, all at the same time!

Since the government is looking for taxes, as it always does, let’s talk not just about imposing taxes, but raising taxes responsibly ie by keeping public health and productivity in perspective too. Ministry of Finance has just announced mini-budget of Rs343 billion, mostly withdrawing exemptions on various items and getting back to 17 percent standard sales tax, across the board. Inevitable, given our commitment to the International Monetary Fund (IMF) for resuming the programme!

If taxes are to be raised, how about raising them on anti-health products and activities? This would not only discourage consumption of unhealthy, rather cancerous, products and activities alongside handling smuggling, but also improve resources, which then can be rerouted to the health sector.

Such unhealthy products and activities include cigarette, urban hukka/sheesha/electric vapes, gukta, paan, mainpuri, mawa, naswar, and so on. Let’s consider some facts. Unsurprisingly, when one talks about oral cancer, what first comes to mind is smoking. But we all subconsciously ignore what havoc these more cancerous smokeless products wreak on both young and old alike. While cigarette brands print health warning/disturbed images for showing the risks of smoking, similar mass awareness endeavours are missing about smokeless tobacco.

As per WHO, in South Asia, oral cancer is the most prevalent among Pakistani men. Numbers show that out of 100 cancer cases, at least 4 cases are of oral cancer in Pakistan. Karachi being more exposed has 30 percent affected. Majority of 900 patients examined at Civil Hospital for oral and throat cancer between January-October 2019 were youngsters suffering from initial stages of oral jaw and throat cancer (all due to chewing betel-nuts, gutka). Further, smokeless products and alcohol consumption contribute to 75 percent of oral cancers in Pakistan.

It is all being sold openly and daringly, despite Sindh High Court’s order for strict action against the sale of smokeless products across the province. The situation is worsening with time, as annually, more than 1.4 million people get affected by oral cancer, courtesy these addictive substances. It also raises the risks of prostrate, lung and kidney cancers.

In the past, those aged above 50 were getting affected by these smokeless products, but now, those below 15 suffer from such afflictions too.

As per the survey conducted by STOP, 1 in every 5 individuals in Pakistan uses tobacco on a regular basis.

On average, a smoker consumes 13 cigarettes a day and spends just under Rs2,000 (10 percent of income) per month. This holds serious consequences for public health and the economy.

News reports show that Pakistan tops the list of countries with the highest number of gutka consumers, surprisingly more than India’s. Every 5th person in Karachi is a gutka, mainpuri or mawa addict. Globally, 300 million people use some form of smokeless tobacco; 85 percent hail from countries like Pakistan, India, and Bangladesh.

First, how about putting an outright ban (in spirit) on every sorts of tobacco? Too harsh? Okay, let’s tax them at least, rather heavily. Strategy should be to tax the smoking-tobacco sector while banning the rest (penalising instead of warning). Because: smoking-tobacco sector, particularly cigarettes, while not healthy at all, is at least generating taxes, while the smokeless-tobacco is not only more harmful but totally undocumented as well. As per estimates, Pakistan’s smoking-tobacco market is over Rs500 billion, while using India’s proxy, smokeless-tobacco market in Pakistan is Rs1.0 trillion.

Smoking-tobacco should be taxed heavily, thereby making it difficult for the masses to afford, and the government should also clamp down on the grey market through track and trace mechanisms. There are some interesting facts to see with respect to the smoking-tobacco sector in Pakistan.

Total cigarette sticks sold annually in Pakistan are 80 billion (100 cigarettes/100 people/day) versus 95 billion in India (19 cigarettes/100 people/day). This is alarming! Worse, while total tobacco in any form is lower at 20 percent in Pakistan versus 29 percent in India, second hand smoke exposure in Pakistan is much greater at 80 percent, compared to 30 percent in India. Particularly, youth being at the forefront of this second-hand exposure is higher in Pakistan at 38 percent, versus 21 percent in India.

As per estimates by Alpha Beta Core research, the overall economic cost of smoking in Pakistan is over $5.0 billion (1.6 percent of GDP). As per TFK, in 2019, the economic cost of smoking was about 5 times greater than the revenue received from the tobacco industry. It’s almost 7 times more today. Further, human cost of using tobacco is much more with about 164,000 deaths every year (~450 deaths per day, about 3 times more than the highest single-day deaths caused by Covid-19 in Pakistan).

We talk of national productivity in general and youth’s in particular. Tobacco use causes fatal diseases and illness, and leads to much greater loss of productivity potential of a Pakistani in her/his youth (Pakistan’s average age is 22.5 years) than in later years.

Further, environmental impact of chewing smokeless tobacco is beyond imagination. Not only is eating up tobacco hazardous, but spitting it out has its own share of spreading diseases.

As per Economics of Tobacco in Pakistan, bringing taxes to 70 percent (WHO) would help half a million users in quitting, reducing premature deaths among adult smokers by over 180,000, while also preventing 725,000 youth from taking up smoking.

It can be done rather immediately, as there is a huge room for raising taxes on cigarettes in Pakistan. As per WHO, Pakistan is much lower at 42 percent duty loaded on price of cigarettes, while the desired level is 70 percent. Significantly lower taxes in Pakistan are one of the key reasons why two big tobacco players, operating in both India and Pakistan, collectively holding almost the entire cigarette market on both the sides sell a volume in India, which is not relatively too big versus Pakistan (British American Tobacco and Phillip Morris collectively hold 96 percent market share in Pakistan versus 83 percent in India).

On the other hand, while Pakistan market stands at 80 billion sticks, Indian cigarette market size is 95 billion sticks. And, if we compare duty on cigarettes in India versus in Pakistan, India generates 7 times more tax revenues compared to Pakistan despite a huge population size. India’s tax revenue from this head rose while consumption came down (110 billion few years back). Conversely, cigarette consumption in Pakistan stood at 77 billion in 2017, and is now at 80 billion. The opposite direction in two markets clearly shows how higher duty load reduced tobacco consumption in one country (India) and lower duty increased it in the other (Pakistan).

The Federal Board of Revenue (FBR) has lost over Rs200 billion in the last 5 years by keeping duty on cigarettes intact, instead of raising it. If we see per pack duty on cigarettes, it stands lowest in Pakistan compared to other major regional countries. For instance, duty on various cigarette brands on average is 82 percent lower in Pakistan at Rs69/pack versus India’s average Rs180/pack, UAE’s Rs376/pack, and Sri Lanka’s Rs513/pack.

By raising FED per stick by just Rs1.00 (keeping sales tax intact) government can generate additional tax of Rs80 billion annually. In fact, taking the duty at par with even the second lowest, India’s, has a potential to generate Rs720 billion in taxes (1.34 percent of GDP). Of course consumption will get impacted, but that is also the intended purpose for duty increase (with grey market strategy in place as India did). So even half of this additional tax would make 75 percent of Pakistan’s combined health budget (total federal and provincial health expenditures are Rs482 billion or 1.2 percent of GDP).

This amount can be allocation to healthcare, and be prudently used by both federal and provincial governments to improve the people’s mental and physical wellbeing, particularly of the youth. This would also help increase productivity.

Food vs tobacco inflation

As per TFK, money spent on tobacco reduces households' spending on food, health, education, housing, and household durables (3 percent of monthly budget on tobacco versus 1.8 percent on education).

This perhaps has been the case due to the fact that prices of basic food items have gone up over 50 percent on average in last 3 years, while the minimum price of a pack of cigarettes remained the same.

For instance, price of sugar went up 37 percent, cooking oil 59 percent, vegetable ghee 57 percent, wheat flour 36 percent, and petrol price by 72 percent, while the price of a pack of cigarette remained at Rs80 at least in the last 3 years.

So, the relative inflation in food versus deflation in tobacco (price of tobacco down in relative terms) has rather contributed to more tobacco consumption.

Action is needed to immediately tax this commodity heavily, enforce minimum price, while rerouting additional funds to developing human capital for sustainable growth. Our economic policy is clearly at loggerheads with the intended outcomes, especially when we put taxes on clean energy (EVs and solar panels etc), pharma raw materials, and agri, food and dairy, while subsidising smuggled tobacco, cigarettes, electric vapes, and smokeless tobacco that threaten public health, productivity and the overall environment. —The wirter is an investment banker