ISLAMABAD: It is usually perceived that an increase in cigarette tax rates could result in a reduction in cigarette consumption and an increase in tax revenues. Taking this rationale forward, calls are made globally to increase tobacco taxes in countries.
According to the World Health Organization (WHO), increasing taxes will reduce the demand for cigarettes which is why recommendations are made for countries to increase tax rates. The Framework Convention on Tobacco Control (FCTC) states that price and tax measures are an effective and important means of reducing tobacco consumption. This may be true in countries whereby illicit cigarettes are not available, however, in a country like Pakistan, where illicit cigarettes sell at 1/5th the price, these arguments are counterproductive as consumers keep switching to such low priced non-tax paid cigarettes. Each country is unique and a one size fit all approach cannot be applied. In reality, any changes in tax rates must be considered along with a range of other factors such as inflation rates, growth in incomes and the potential impacts on the market for illicit cigarettes etc.
During last 5 years the Government has levied excessive excise increases, in light of such recommendations by the WHO. The net result, a widening price differential between legitimate industry brands and illicit brands, leading to a sharp rise in the sales of illicit cigarettes and a subsequent decline in the legitimate sector, keeping the overall industry consumption the same. The WHO itself states that ‘without prejudice to the sovereign right of the Parties to determine and establish their taxation policies’, which in essence means that countries reserve the right to establish their own policies.
Consumption of illicit cigarettes is driven by a number of factors in different countries. These may include the macroeconomic environment, the regulatory burden on duty paid manufacturers and varying levels of enforcement. In Pakistan, however, as history has shown, the key determinant of illicit cigarette consumption is the growing price differential between duty paid cigarettes and illicit cigarettes. As illicit cigarettes avoid taxation they can be priced substantially below the price of even the cheapest duty paid cigarettes. For a given level of income this makes illicit cigarettes more affordable for consumers than duty paid cigarettes. As cigarette taxes are increased over time, this tends to increase the price differential between duty paid and illicit cigarettes further. The minimum tax per packet of cigarettes is Rs. 43, whereas there are local duty evading cigarettes selling well below this price, as low as Rs. 15.
In a recent meeting held by the Public Accounts Committee, it was highlighted that 88 billion cigarettes are consumed in Pakistan annually. It is an established fact that over the last 5 years, the consumption of cigarettes in the country has remained, more or less the same, standing at 81 billion sticks. However, the shift from legitimate industry volumes to the illicit industry has rapidly increased, with more than 40% of the market being illicit.
With such excessive excise led price increases, estimates reveal that the prices of legitimate cigarettes have increased by more than 100% over the last six years, whereas the prices of illicit cigarettes have seen a zero to nominal increase. In Pakistan, according to sources, more than Rs. 45 billion was lost by the government in the year 2015/16 in the form of potential revenues. Furthermore, the government contribution by the legitimate industry is also set to decrease, which shows that a uniform approach cannot be adopted for all countries. Each country and its dynamics are unique and must be dealt with separately, factoring in different variables.
Taking notice and showing great concern over the rapidly growing illicit cigarette market, the Federal Board of Revenue (FBR) constituted a joint task force called the IR Enforcement Network on Illicit Tobacco trade. The enforcement network under the supervision of CCIR, RTO Rawalpindi, as central coordinator, conducted raids in different cities all over country and confiscated a whopping 122 million illegal cigarettes, including tax evaded imported cigarettes and locally produced tax evading cigarettes.
Although the government is now actively carrying out enforcement drives all across the country, consistent enforcement needs to be a priority to curtail this growing black sector that continues to dent the economy. Furthermore, only enforcement against the crime will not deter the criminals, there need to be proper systems in place in order to stop the supply, i.e. create disincentive for the illicit players from making profits. Concrete fiscal and regulatory measures need to be taken in order to discourage, reduce and eliminate this form of illegal behaviour.