The implementation of health tax to be levied on the tobacco industry, being lobbied for by the anti-tobacco sector, will have a negative effect on tax collection from the tobacco sector in Pakistan.
According to the world-renowned research institute, Oxford Economics, the tax evaded cigarette sector share stands at 37.6% currently, primarily due to a 93% excise rate increase in the past 18 months; this did not cause substantial decrease in tobacco consumption in the country. Due to this unprecedented increase in taxation, the tax evaded cigarette sector share rose from 33 % to 37% causing the government to incur losses of more than Rs 70 billion during this period.
The unregulated sector takes immense advantage of increased taxes on the regularized tobacco sector. They have been selling a 20-cigarette pack at PKR 25-40 for the past 8 years and will continue to sell at the same price point even if health tax is levied. The price point at where these cigarettes are being sold are below the minimum applicable taxes of Rs. 44.25 and below the minimum price of Rs 62.75 per pack set by the government; a violation that till date anti-tobacco lobby has failed to acknowledge.
Levying health tax on regularized cigarettes will not help achieve the desired objectives and instead would cause a downshift by the consumers to tax evading cigarette brands. According to PricewaterhouseCoopers (PwC), one of the worlds-leading consulting firm, a shift of consumption towards duty not paid cigarettes will likely cause the government to fail to meet revenue targets from the tobacco sector.