Going up in smoke

Is illegal cigarette trade enough justification for the tobacco industry to demand tax relief?

Research says that in Pakistan, more than 19 percent of the adults consume tobacco. This contributes to around 160,000 deaths per year and spread of several diseases among smokers. The Ministry of National Health Services Regulation and Coordination claims that it is striving to discourage this trend using several methods and has a dedicated Tobacco Control Cell (TCC).

The TCC implements the ministry’s plans and sees whether local anti-tobacco laws and terms of international convention on tobacco control are complied with or not. The cell also runs awareness campaigns in which it warns people about the hazards of smoking and tries to persuade smokers to quit smoking.

Several laws and rules disallow advertising of cigarette projects, ask for placement of graphic pictorial warning on cigarette packs, ban display of posters, billboards, etc, at the point of sale, prohibit sale of cigarettes to children, disallow sale of loose cigarettes and so on. In case of violation, authorities can punish the violators. However, many a time such violations go unnoticed.

While the tobacco industry finds it difficult to defy these laws, it is alleged that it uses its considerable influence to shape the tax structure in a way that it suits it. It is definitely a challenge for the industry as the World Health Organisation’s (WHO’s) Framework Convention on Tobacco Control (FCTC), to which Pakistan is a signatory, calls for gradual increase in Federal Excise Duty (FED) to make cigarettes expensive and out of the reach of most smokers.

The argument for tax relief is that high taxes make legitimately produced cigarettes expensive and promote illicit trade and smuggling of cigarettes which are cheaper.

The argument is based on a clear statement that tax departments and anti-smuggling squads are unable to check these activities. But instead of making a demand to make them effective, tax relief is considered to be the only option. As the next budget is not far away, the noise about illicit cigarette trade affecting revenue collection is getting louder. At the same time, anti-tobacco campaigners are asking for stricter rules and increase in taxes on tobacco products under the obligations signed with the WHO.

Dr Ziauddin Islam, the technical head at the TCC, says the cell and the ministry are convinced that the tax structure should be tough for cigarette manufacturers and taxes should be increased regularly. He adds that illicit cigarette trade is around 15 percent but the cigarette industry claims that it reaches around 40 percent to 50 percent. The purpose of presenting these figures by the industry is to get the tax rate reduced and keep the product affordable for a large segment of society.

He says while there are local manufacturers as well, around 98 percent of the market share is held by two multinational companies Pakistan Tobacco Company (PTC) and Phillips Morris International (PMI). Both are good at lobbying.

Islam cites a survey titled, Studying Tobacco users Of Pakistan (STOP) done in collaboration with the health ministry and several universities and organisations in Pakistan, Germany, South Africa and the UK and funded by the European Union (EU) to validate his claims. An extract from the STO survey: “A recent move to impose higher taxes on cigarettes was blocked on the basis of a fictitious industry ‘report’ (never made public), which asserted that illicit trade constitutes 41 percent of the cigarette market share and an increase in taxes will lead to more smuggling – a claim often made by the industry and constantly refuted by independent research in other countries.” He claims that the figure of 41 percent is false and that the share of smuggled cigarettes is around 15 percent.

The WHO recommends raising tobacco excise taxes so that they account for at least 75 percent of the retail price. It also says that if countries increased the excise charged on cigarettes by 50 percent, there would be 49 million fewer smokers.

The STOP survey report says the ministry is keen to propose higher taxes in the next budget but will need to be supported by unbiased evidence of the magnitude of illicit tobacco trade in Pakistan.

Madeeh Pasha, Manager, Corporate Affairs, PTC, counters the allegations that they present fake figures to gain tax benefits and stop the government from increasing FED. He tells TNS that the legitimate tobacco industry demands that there should be no excise-led price increases as the illicit sector has reached a staggering 37 percent share of the total cigarette industry and the tax evasion now amounts to more than Rs 40 billion per year. He says a decrease in excise this time around has been suggested in order to provide a more level playing field.

Pasha says if the government does not take adequate measures the survival of legitimate industry is at stake. He says the legitimate tobacco industry also demands that the advance FED at Green Leaf Threshing (GLT) stage of Rs 10 per kg should be increased to Rs 500 per kg. This, he says, is the best way to ensure documentation of all tobacco processed and will help reduce illicit cigarette trade.

Malik Imran, the country representative for Tobacco Free Kids (TFK) – an international organisation working on tobacco control, agrees that smuggled cigarettes affect revenue collection. “It is a matter of enforcement. The state machinery tasked with curbing illicit trade and smuggling should be strengthened and given more resources rather than giving the cigarette industry a breather through a favourable tax structure.”

He says in 2017 the federal government introduced a three-tier excise duty structure for cigarettes – with a new tier for the low-priced brands. In this system, flat tax rates were applicable on cigarette packs falling in three different brackets. Imran says the government can earn Rs 40 billion additional revenue if it imposes tobacco surcharge on cigarette manufacturers.

In the past, we would hear about taxes like ‘sin tax’ and ‘health levy’ and it seems there was no agreement on these names.

According to a 2018 study Tobacco Control in Pakistan: The Impact of Tax Reduction Policy, the tax rate applicable on the new tier – which was the lowest tier - was reduced by 48 percent, from Rs 1.5 per stick to Rs 0.8 per stick in 2017. The cigarette companies slightly reduced the prices of certain products and shifted volumes to low-end products to gain tax benefits of the lowest tier.

In 2017-18, the study fuond out that domestic production of cigarettes had increased by 72 percent, while tax revenue increased by only 4.5 percent. Thus, the introduction of a three-tier structure actually led to a decrease in the effective rate of excise duty. The reason was that a huge volume of cigarettes produced that year fell in lowest-tier in the absence of a flat tax rate.

The WHO recommends raising tobacco excise taxes so that they account for at least 75 percent of the retail price of smoking tobacco products. It also estimates that if all countries increased the amount of excise charged on cigarette packs by 50 percent, there would be 49 million fewer smokers and at least 11 million tobacco-related deaths would be averted. Beyond the health benefits, the WHO says, taxes on tobacco have a secondary added value, in that they increase revenue.


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Going up in smoke: Is illegal cigarette trade enough justification for the tobacco industry to demand tax relief?