Plugging the gap

There is a discrepancy between the listed retail price of cigarettes and the price they are sold at

Plugging the gap


he cigarette industry, which has a billion-dollar-revenue, employs a number of tactics to avoid taxes and promote sales in violation of rules.

Pakistan has a high tobacco use prevalence. Around 60 billion cigarettes are produced every year in the formal sector. However, this sector does not generate revenue proportional to its volume. The gap between the retail price printed on the pack and what retailers charge from customers, is one of the loopholes that need urgent attention of the government.

The government can generate billions of rupees every year by plugging the gap. The discrepancy between the listed price and actual charge is quite evident. Yet no action is taken by the authorities in this regard. For example, two famous brands are priced at Rs 583 and Rs 483, respectively. However, they are sold at Rs 600 and Rs 500, respectively, at retail outlets.

The situation worsens in the sale of loose cigarettes, with individual sticks going for up to Rs 40, translating to a staggering Rs 800 for a pack of 20. “I started smoking in 2002 and initially we used to buy a few sticks,” says Rana Abrar, a 46-year-old resident of Islamabad. He says that many youngsters like him would never check the price printed on the cigarette pack. Many shopkeepers would charge double the listed price of a cigarette, he says.

“We seldom checked the price printed on the pack,” says a student who wishs not to be named. He says that shopkeepers charge round figures and the prices are always higher than those printed on the packets.

The Framework Convention on Tobacco Control has established that sale of loose cigarettes increases the affordability and accessibility of tobacco for minors. Numerous research studies have underscored the correlation between the widespread sale of loose cigarettes and the elevated prevalence of addiction among the youth.

Last year, Bangladesh’s National Board of Revenue estimated that proper tax collection based on retail sales prices could have generated an additional Tk 50 billion (more than $450 million) in revenue from the tobacco sector. “Pakistan can also generate billions of rupees in additional revenue by simply fixing the retail price gap,” say Malik Imran Ahmed, the Campaign for Tobacco Free Kids country director.

He refers to the Federal Board of Revenue data, saying that every year around four billion packs of cigarettes are produced in Pakistan. “Pakistan can generate additional revenue of around Rs 25 billion to Rs 28 billion by bridging the price gap.”

Ahmed says that when loose cigarettes are sold the price of a Dunhill pack, for example, reaches around Rs 800. “This means that the industry has the capacity to absorb the price increase although they claim that a raise in prices of cigarette will have an adverse impact on the industry,” he says.

Ahmed urges the newly appointed finance minister to look into this sector and believes that the cigarette industry has the potential to contribute around Rs 300 billion if the loopholes are plugged. He points out that Bangladesh’s response of setting a maximum retail price for a pack of cigarettes by plugging the gap between what retailers charge from customers and what is printed on the packet can be replicated to secure vital revenue.

He refers to a recent move by multinational tobacco companies operating in Pakistan that have introduced low-priced cigarettes in violation of the rules, and asks the authorities to take action against them.

The World Health Organisation reports that approximately 80 percent of the 1.3 billion tobacco users worldwide live in low- and middle-income countries, where the burden of tobacco-related illnesses and deaths is most prominent. Pakistan, the seventh-largest tobacco-consuming country globally, signed the Framework Convention for Tobacco Control in 2004 to check and control tobacco use.

Ban on the sale of loose cigarette sticks is one such example. It was introduced in 2018 to discourage smoking but it couldn’t hold ground for long. “A majority of the youth buy loose cigarette sticks,” says Yasir Sheikh, who runs a cigarette kiosk in a busy commercial centre in Rawalpindi. Sheikh refers to the ban in 2018 and says that the decision had hit the small venders like him because the move cuts their profit margin.

The World Bank’s Overview of Tobacco Use, Tobacco Control Legislation, and Taxation highlights the industry’s role in the decline of government revenue in 2016-17. Actions, such as forestalling, price over-shifting and overestimating illicit trade have allowed the industry to manipulate taxation policies to its advantage.

Forestalling, the practice of increasing production or stock of products in anticipation of a tax increase, was evident as the tobacco industry overproduced cigarettes from 2014 to early 2016. These overproduced cigarettes, taxed but kept in stock until May 2016, were then used for retail sales when the excise rate was reduced in May 2017 through the introduction of the third-tier.

Price over-shifting involved raising cigarette prices by more than the tax increase and inflation rate. While this strategy increased profits for the tobacco industry, it contributed to about half of the final retail price increase between 2014 and 2017. The industry insisted that the price hike was tax-driven.

The industry also overestimated illicit trade, the argument through which it persuaded the government to introduce a third-tier. These tactics along with inefficient tax collection machinery resulted in a colossal loss of Rs 567 billion in potential revenue over seven years.

The World Health Organisation advocates for robust tax measures to curb tobacco consumption, emphasising the effectiveness of a 10 percent increase in tobacco prices in reducing consumption, particularly in low- and middle-income countries. But the cigarette industry has lobbied against the tax increase.

A study by the Pakistan Institute of Development Economics revealed the dire consequences of smoking-related diseases and deaths, with costs reaching Rs 615.07 billion or $3.85 billion in 2019, amounting to 1.6 percent of the GDP. The government’s recent decision to hike the FED on cigarettes has not only boosted revenue but has also played a pivotal role in curbing cigarette consumption in the country.

A study by the Capital Calling, a network of academic researchers and professionals, has revealed that one in 94 smokers have quit smoking after the prices were raised.

According to a World Bank report, “A significant revenue gain of 0.4 percent of GDP (Rs 505.26 billion) could be achieved by applying the current rate on premium cigarettes (Rs 16.50 per cigarette) to standard cigarettes as well.”

Recognising the existing gap between the printed retail price on cigarette packets and the actual amount charged by retailers, the Bangladesh government has taken a decisive step to address this issue. Last year, the Bangladeshi finance ministry announced a plan to set a maximum retail price for a pack of cigarettes to earn more revenue, plugging the gap between what retailers charge from customers and what is printed on the packet.“

The policymakers must not overlook the losses in missed revenue and health costs due to the prevalence of smoking.

The writer is an Islamabad-based researcher and journalist with an interest in health and taxation

Plugging the gap