Rethinking taxes on tobacco

Pakistan lost a staggering Rs567 billion over seven years due to the influence of cigarette companies

Rethinking taxes on tobacco


n the labyrinth of Pakistan’s economic landscape, where challenges loom large and the tax base remains narrow, the International Monetary Fund has illuminated stark realities while advocating for a fundamental shift in policy.

“Pakistan’s tax system is underperforming in terms of revenue generation as well as efficiency, equity, fairness and sustainability. This reflects deep-seated structural legal, administrative and policy issues, as well as a ‘difficult-to-tax’ economy due to widespread informality and a large agricultural sector,” the IMF noted in a report titled, Tax Policy Diagnostic and Reform Options.

In the backdrop of these challenges, the government has embarked on a series of tax policy reforms, often in collaboration with IMF-backed economic programmes. These reforms, range from rationalising tax expenditure to adjusting income tax rates and increasing excises on select sectors like petroleum and tobacco, aimed to bolster revenue streams and enhance fiscal stability.

Pakistan has a high prevalence of smokers, with an estimated annual production of around 60 billion cigarettes in the legal sector. However, due to some loopholes, this sector fails to generate revenue in line with its considerable output.

This dialogue includes the tobacco sector, a domain fraught with complexity and controversy. Bu harmonising tax structures within the sector, Pakistan can not only shore up revenue streams but also address public health concerns associated with tobacco consumption.

Pakistan, the seventh-largest tobacco-consuming country globally, signed the Framework Convention for Tobacco Control in 2004 to check and control tobacco use.

The World Health Organisation advocates for robust tax measures to curb tobacco consumption, emphasising the increase in tobacco prices to reduce consumption, particularly in low- and middle-income countries.

The cigarette industry has always lobbied against the tax increase without taking into consideration the health cost affiliated with affordability of the cigarettes.

Pakistan lost a staggering Rs 567 billion over the last seven years due to the influence of cigarette companies which successfully lobbied against a tax hike.

A study by the Pakistan Institute of Development Economics has revealed the dire consequences of smoking-related diseases and deaths, with costs reaching Rs 615.07 billion ($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 has quit smoking after the prices were raised.

The IMF has also noted a significant drop in consumption of cigarettes in the country after the prices were raised in 2019.

Rethinking taxes on tobacco

Pakistan has a high prevalence of smokers, with an estimated annual production of around 60 billion cigarettes in the legal sector. However, due to some loopholes, this sector fails to generate revenue in line with its considerable output.

“FED rates on tobacco products were gradually increased between 2019 and 2022, and then saw a big increase by on average 146 percent in February 2023. Survey findings suggest that as a result of this increase, the consumption of cigarettes has declined by 20-25 percent,” the IMF noted.

The global lender has recommended to “apply the same rate of excise on all locally manufactured cigarettes,” regardless of whether the manufacturer is local or foreign. “Tax e-cigarettes in a similar way to tobacco, given equivalent internality.”

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.”

Health activists and experts in the subject have thrown their support behind the IMF recommendations of restructuring tobacco taxation.

Malik Imran Ahmed, the country head of Campaign for Tobacco Free Kids, emphasizes convergence between the IMF’s suggestions and the ongoing dialogue within Pakistan.

Ahmed says that it remains critical for policymakers to heed the IMF’s guidance on tobacco taxation amidst Pakistan’s ongoing economic challenges.

“By prioritising public health and fiscal stability, Pakistan can chart a course towards a healthier and more prosperous future for its citizens,” he adds.

Dr Hassan Shehzad from the International Islamic University says that the IMF recommendations are in line with the WHO guidelines. He says multinational companies manage to place their cigarettes in lower tier. This results in reduction in cigarette prices due to the existing two-tier taxation system.

Professor Muhammad Zaman, the founding chairman of the School of Sociology at Quaid-i-Azam University, endorses IMF’s recommendations and says the policymakers should prioritise public health.

Dr Khalil Ahmad Dogar, programme manager at the SPARC, also advocates for the adoption of the Single Tier Tobacco Taxation System advocated by the IMF to bolster revenue and alleviate the health and economic burdens associated with tobacco consumption.

Earlier this month, former health minister, Dr Nadeem Jan, underscored the need for a substantial 50 percent tax increase on tobacco products to curb consumption, particularly among the youth.

He also dismissed tobacco industry’s assertion of potential increases in illicit trade due to higher taxes, saying taxation is a crucial tool in combating tobacco-related health issues.

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

Rethinking taxes on tobacco