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Taxing tobacco

Tobacco consumption has been termed an epidemic by the World Health Organisation (WHO) due to its severe long- and short-term effects. More than 1.3 billion people consume tobacco products daily. This causes around eight million deaths. The most horrendous aspect of such the high tobacco consumption is that around 80 percent of habitual smokers live in low- and middle-income economies. Nearly 60 percent of this population lives in Asia.

South Asia remains one of the most affected areas and bears huge health costs due to the tobacco use. Due to these horrifying statistics, the WHO has categorically denied the existence of a safe level of exposure to tobacco.

Taxation is considered one of the most useful tools to lower tobacco consumption. As per WHO, if all countries impose at least 50 percent excise duty on a cigarette pack, the number of tobacco consumers would decrease by 49 million. The WHO says that high taxation and increased prices have always resulted in a decreased use of tobacco products.

The data suggests that cigarette smoking declines in the presence of a strong taxation regime. This has encouraged states to improve their tobacco taxation strategies. Organizations like Bill and Melinda Gates Foundation and Bloomberg are also striving for a global coalition to bring about tobacco tax reforms across the globe.

As far as South Asia is concerned, the cigarette tax scorecard 2020 paints an overall dismal picture. While some of the countries have raised taxes of tobacco products, their efforts cannot be called a game changer for the widespread tobacco use in the area.

With a score of 1.88 out of 5 points, Indian tobacco taxation regime is ranked much lower than the global average of 2.07. The amendments in local taxation regime started in 2011 with an augmented excise duty in 2014-15 and banning of e-cigarettes in 2019. Due to such efforts in 2020, the local tobacco tax collection reached a record 348 billion Indian rupees. However, despite of its efforts to raise taxes on tobacco products, the health costs have not declined as envisioned. The main reason is the differential tiered tax system which leads to increased consumption of low-cost cigarettes.

Both Bangladesh and Sri Lanka have shown tremendous improvement in the curtailment of tobacco-related products. Sri Lanka is the only country in the region that has scored 3 out of 5 points on the cigarette scorecard. The reverse shift of Value Added Tax (VAT) and excise duty were the major factor behind bringing down cigarette consumption in Sri Lanka.

While increasing the excise duty levied on tobacco products in 2016, the affordability of cigarettes was reduced sharply, leading to the production of 4 billion cigarettes per annum in 2016 as compared to 5.2 billion sticks per year in the late 1990s.

Bangladesh which once ranked highest in tobacco-consumption with more than 46 million consumers has shown incredible progress. From 2010 to 2018, the tiered tax mechanism implemented by the National Board of Revenues computes the excise duty as percentage of its retail price. Since 2015, the tiered system has been simplified by eliminating the middle tier.

Additionally, a 1 percent health development surcharge has been imposed along with 15 percent VAT. Owing to its dedicated efforts, Bangladesh has secured a score of 2.38 on cigarette scorecard 2020, a tremendous improvement from a score of 0.88 in 2014.

With a score of 0.88 on cigarette scorecard, Pakistan’s situation does not look promising. Therre are about 22 million tobacco users in the country with 1.5 million cases of oral cancer reported by Pakistan Medical Association on a yearly basis.

Pakistan needs to levy a sin tax and a value-added tax to comply with the WHO rules which suggest about 70 percent tax to restrict availability of tobacco products.
A simpler tiered tax regime was introduced in 2013 where the lower and upper limits for a pack of 20 cigarettes were kept at Rs 17.6 and Rs 46.5, respectively. During 2014-16, the government continued to increase the taxes. However, the institutional and governance issues led to a low excise duty on these products.

Successive governments have paid no heed to the rising tobacco consumption, particularly among the youth of the country. The Federal Board of Revenue faces severe resource constraints to effective implementation of a suitable tax regime.

Cigarette businesses play an important role in keeping the prices low. They exercise a huge influence over legislative bodies so that favourable tax policies are made. A particularly controversial move was the introduction of a third tier in taxation to favor the tobacco industry.

In 2017, through SRO 407(I)/2017, the FBR introduced a third tier. The Auditor General of Pakistan (AGP) reported that this move resulted in a loss of Rs 33 billion for the government in one year. The AGP claimed that before the amendment, about 23 percent of smokers did not smoke more than 5 cigarettes a day. After 2017, the proportion of of smokers consuming less than 5 cigarettes per day dropped to 1 percent. The third tier was abolished in 2019.

Tax relaxations are demanded in the name of illicit trade. While the consumption volume stands at a whopping 86.6 billion cigarettes per year, the figures reported by the industry acknowledge only 55 billion. The rest is blamed on illicit trade. Independent observers say the volume of illegal trade is about 9 percent, way less than the 41percent reported by the tobacco companies. These figures raise suspicions of tax evasion by leading tobacco companies and speak volumes about the power of tobacco lobby in statutory institutes and its disastrous impacts on economic and healthcare sectors. Consequently, the average price of cigarette pack remains the lowest in Pakistan.

It is obvious that the region lags behind other parts of the world in controlling cigarette and tobacco consumption. A uniform tax system needs to be enforced at all levels to end tax evasion. In South Asia, the tiered taxes provide tax evasion opportunities to tobacco companies, thereby causing serious economic and health implications.

A high and uniform tax would push the prices of tobacco above the average income growth, thereby keeping youths and children away from these products. In addition, the lower income segment of the society will not burden the national exchequer by consuming additional cigarettes and the healthcare costs could be contained. A single tariff will not only strengthen the revenue generation mechanism, the problem of illicit trade will also be dealt with more effectively.

Besides imposing a uniform tax, Pakistan needs reforms to overcome capacity constraints. The FBR needs to be empowered to improve its coordination with other departments regarding tax monitoring, collection and compliance.

The influence enjoyed by tobacco industry needs to be curtailed through strict enforcement of laws against tobacco products in a letter and spirit. Pakistan needs to levy a sin tax and a value added tax to comply with the WHO rules that suggest about 70 percent tax to restrict the availability of tobacco products. Pakistan also needs to pass detailed legislations in favour of banning both direct and indirect forms of tobacco advertisements. In this context, under the act of corporate social responsibility, any activity of brand sharing, distribution and promotional ads should be strictly barred. These measures are the need of the hour to ensure a tobacco-free Pakistan.

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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.