Daily Times

When the 3rd tier in certain sectors’ tax structure was introduced in 2017-2018 financial budget, the FBR and industries claimed that this will considerably increase government revenues and will reduce illegal trade of products.
However, those claims were proved miserably wrong when the FBR had received only Rs83 billion in year one and Rs90 billion in year two after the third tier was introduced in the tobacco sector, come down from 114 billion in 2015-16. Another ensuing disaster was that cigarette production jumped 90% immediately after the introduction of the low-tax third tier. This resulted in the shocking increase of tobacco-related health cost burden from 140 billion in 2014 to 615 billion (around US$ 4 billion) in 2019. This was verified by the State Bank report as well as by the Pakistan Institute of Development Economics (PIDE) in their recent study.
The strategy of FBR to increase revenue by decreasing tobacco taxes failed miserably. The only beneficiary of the third tier was the big Tobacco Industry, which made huge profits due to increased sales while causing around 30 Billion Rupees direct losses to the National exchequer in 2017-18 alone.
Soon after the removal of the third tier in 2019, the revenue collection jumped to more than 120 billion provings yet again that increase in taxes actually increase government revenues.
Tobacco Industry is once again putting extreme pressure on the government to re-introduce the third tier through lobbying and vicious campaigning. The industry poured millions of rupees to propagate a false narrative of lost revenues due to illicit trade and has exploited key celebrities from both media and sport to advance this narrative.
Tobacco taxes are not the primary reason for cigarette smuggling. Levels of smuggling are generally higher with lax law enforcement and criminal prosecution, weak penalties for smuggling crimes, and corruption in a country. Other factors include the ease and cost of operating in a country, organized crime networks, government policies regarding illicit trade of tobacco products, and the general acceptance of illicit trade in a country.
Every nation and sub-national entity with an efficient tax system that has significantly increased its cigarette tax has enjoyed substantial increases in revenue, even while reducing tobacco use. In South Africa, for example, every 10% increase in excise tax on cigarettes has been associated with an approximate 6% increase in cigarette excise revenues, even as tobacco use declined. From 1994 to 2001, excise revenues more than doubled as a result of tax increase in South Africa
On the International front, the Protocol to Eliminate Illicit Trade in Tobacco Products (ITP) was adopted by the Parties to the WHO Framework Convention on Tobacco Control (FCTC) in November 2012 as the global solution to illicit trade. The ITP calls for supply chain controls related to licensing, tracking and tracing, record-keeping; regulation of tobacco product sales by internet, phone, and tax- and duty-free zones; and criminal liability and international cooperation. The ITP will complement and expand the Parties’ obligations under Article 15 of the FCTC. To date, 25 countries have ratified the ITP, and another 15 must ratify the protocol in order for it to enter into force. Pakistan should ratify and follow the ITP in order to combat issues of illicit trade.
Raising the price of cigarettes is the principal measure for discouraging consumption and avoiding the initiation of tobacco use among children and youth. Reduced tobacco consumption will result in a healthier and more productive workforce, which will help boost the economy. Increased government revenues from higher taxes and reduced health care costs for tobacco-related diseases can finance government programs that benefit the economy. World bank in its report recommends,” Annually increase the excise rates by at least 30% for the lower tier and at least by 15% for the higher tier to ensure the reduction in cigarette consumption and the growth of tobacco revenue. The perspective aim is to set unified specific excise rate for all kinds of cigarettes”. Another report from SPDC says that Pakistan can have PKR 19 billion in additional total tax revenue if FED on cigarettes is increased by 30%.
Will the elected government, which claims to be pro-people, opt to favor the big Tobacco Industry, or will it be keen to protect the health of its people, is a matter to be seen in the budget 2021-22.