The World Health Organisation requires parties to the Framework Convention on Tobacco Control to impose progressively high taxes on tobacco products to discourage its use. While most high-income countries have implemented these measures, two decades after its adoption, many low- and middle-income countries including Pakistan continue to struggle in his regard.

Pakistan lacks a clear strategy to use taxes on tobacco as a public health tool. The major tax on cigarettes is the Federal Excise Duty. A two-tiered specific tax system was introduced in 2013. It remained in force with annual adjustments till 2017. However, the tobacco industry claimed that there was rampant smuggling and illicit products had flooded the market and lobbied for a three-tier excise duty structure for cigarette that was then implemented. This included a tier for less expensive brands with a 50 percent reduction in tax per cigarette stick.

The data from yearbooks published by the Federal Board of Revenue, Senate Special Committee report and the Auditor General of Pakistan’s report, are startling.

Protecting tobacco tax policies from vested interests is crucial for effective public health initiatives. However, in Pakistan, multinational companies continue to influence government policies. The concern has been highlighted in the Global Tobacco Industry Interference Index of 2023.

In the case of the introduction of the third tier, the government was fed exaggerated claims of over 40 percent illicit trade in the tobacco sector. Consequently, the government changed the policy for two-tiered taxation to three tiers. The introduction of the third tier caused a substantial loss to the national exchequer, led to increased tobacco consumption and bolstered industry profits.

Originally, Rs 68.72 FED was charged on the packs of cigarettes priced more than Rs 80, and Rs 30.68 on the packs priced at Rs 80 or less. Consider a brand priced at Rs 85. With the introduction of the third tier, the price of the top brand was raised to Rs 90. This created an impression of a price hike. However, because the Rs 90 price now fell under the second tier in the three-tier system, the FED paid per packet dropped to Rs 33.40 from the previous Rs 68.72.

Thus the introduction of third-tier without imposing a ban on the tobacco industry to shift their products from higher to lower tiers resulted in increased production by the tobacco industry, enhanced sales, increased consumption, simultaneously causing a loss of revenue, because some of the popular brands were moved from higher to lower tier.

Consequently, with the introduction of the third tier in the tobacco taxation regime, the revenues fell from Rs 114.27 billion in 2015-16 to Rs 83.76 billion in 2016-17. Also, in 2017-18, the profits of top two tobacco industries in Pakistan went up substantially (registering up to 160 percent increase).

The fiscal years 2012-13 and 2013-14 had witnessed growth in tax collection but in the subsequent years, the revenue fluctuated. The government had estimated the FED collection to be Rs 1,795.46 billion from 2013 to 2023. However, the actual revenue was Rs 1,228.12 billion, making for a shortfall of Rs 567.34 billion.

Following the enormous loss, the National Accountability Bureau initiated an inquiry into tax savings of Rs 33 billion by two global cigarette manufacturers due to the revision in the tax tier system. The Senate Special Committee on Tobacco questioned the drop in tax collection after the implementation of the third tier.

The Auditor-General of Pakistan too noted an increase in sales turnover for major tobacco companies but a decrease in tax collection and refuted the “40 percent smuggled tobacco products” narrative. It is noteworthy that the tobacco industry continues to promote similar narratives in social media campaigns and internet advertising.

Pakistan ranks among the top 10 countries in tobacco consumption. This imposed a strain on the healthcare system. The introduction of a lower tier aimed at curbing illicit trade neglected the health burden, with direct costs attributable to tobacco surpassing overall tax revenue from the industry. The tax structure changes made cigarettes more affordable, leading to increased consumption and healthcare burden.

The FCTC recommends a comprehensive tobacco taxation policy based on global best practices, FCTC Article 6, WHO’s Manual on Tax Administration and national health strategies.

The policy should have a uniform and simple tobacco taxation system with an annual excise rate increase of at least 30 percent to reduce consumption and boost revenue. There is a need to reduce the tobacco industry’s influence in policy formulation and to monitor pricing strategies to prevent forestalling, differential shifting and shrinkflation.

Pakistan has now implemented a track and trace system. Stringent monitoring and enforcement is the only way to make it work. There is a critical need for a coherent, evidence-based tobacco taxation policy to mitigate revenue losses, address public health concerns and curb undue industry influence.

The writer heads the Centre for Health Policy and Innovation at the Sustainable Development Policy Institute