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Using taxation to curtail tobacco use

The World Health Organisation (WHO) calls tobacco consumption an epidemic due to its severe short- and long-term repercussions. Daily, over 1.3 billion people worldwide consume tobacco products. There are an estimated 8 million tobacco-related deaths annually.

Around 80 per cent of smokers live in low- and middle-income economies, with 60 per cent of the population living in Asia. South Asia remains one of the most affected areas and bears most of the health costs incurred due to the tobacco use. The WHO has categorically stated that there is no safe level of exposure to tobacco.

Taxation is considered the most useful tool when it comes to deterring tobacco consumption. As per WHO guidelines, if all the countries impose at least 50 percent excise duty on a cigarette pack, the number of tobacco consumers would decrease by 49 million.

The data suggest that cigarette smoking declines in the presence of a robust taxation regime. This should encourage states to improve their tobacco taxation strategies.

As far as South Asia is concerned, the cigarette tax scorecard 2020 paints an overall dismal picture. Although some countries are playing a substantial role in increasing tobacco taxation, the fact remains that these efforts have not proved enough for widespread change in tobacco use in the area.

With a score of 1.88 out of 5 points, the Indian tobacco taxation regime is much below the global average of 2.07. The amendments in the local taxation regime started in 2011 with augmented excise duty in 2014-15 and banning e-cigarettes in 2019. Due to such efforts, in 2020, the local tobacco taxes reached 348 billion Indian rupees. However, despite its continuous efforts to increase the taxation on tobacco products annually, the fact remains that its health costs could not be reduced as envisioned. The main reason is the differential tiered tax system, which leads to increased consumption of low-cost cigarettes.

On the other hand, Bangladesh and Sri Lanka have shown considerable improvements in tobacco-related products’ curtailment. Sri Lanka is the only country in the region that has secured 3 out of 5 points on the cigarette scorecard. The reverse shift of Value Added Tax (VAT) and excise duty is the reason for the change.

Bangladesh, once the leading tobacco consumer with a recorded 46 million consumers, has made incredible improvements. From 2010 to 2018, the National Board of Revenues’ tiered tax mechanism computes the excise duty as a percentage of its retail price. From 2015 onwards, the tiered system was simplified by eliminating the middle-tier option. Additionally, 1 per cent of health development surcharge has been imposed along with a 15 per cent VAT. Through dedicated efforts, Bangladesh has secured a 2.38 on the cigarette scorecard 2020, a tremendous improvement from the previous score of 0.88 in 2014.

With a score of 0.88 on the cigarette scorecard, Pakistan’s situation does not look promising. There are about 22 million tobacco users in Pakistan, with 1.5 million oral cancer cases reported by the Pakistan Medical Association yearly. A much simpler tiered tax version 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 taxes. However, the institutional and governance issues led to the lowest excise duty levied on these tobacco products. Successive government paid no heed to the rising tobacco consumption, particularly among the country’s youth. The Federal Board of Revenue faces severe resource constraints to implement a suitable tax regime effectively.

Additionally, proponents play an essential role in keeping the prices of cigarettes low. With their massive influence over legislative bodies, a favorable taxation system is levied. A particularly controversial move was introducing a third-tier system in taxation, which favored the tobacco industry. In 2017, through SRO 407(I)/2017, FBR introduced a third tier instead of the two-tier system previously implemented. The Auditor General of Pakistan (AGP) reported that this move alone resulted in a loss of Rs 33 billion for the government in one year. The AGP claimed that about 23 per cent of smokers did not smoke more than five cigarettes a day before the amendment. Conversely, after 2017, smokers’ rate of consuming less than five cigarettes per day dropped to a mere 1 per cent. The third tier was abolished in 2019.

Tax relaxations are demanded in the name of illicit trade. While the consumption figures stand at a whopping 86.6 billion cigarettes per year, the industry’s official figures acknowledge 55 billion only. The rest is usually blamed on illicit trade; however, the volume of illegal trade is not more than 9 per cent, which is way less than the tall figure of 41 per cent reported by the tobacco companies. These figures raise suspicions of tax evasion by leading tobacco companies and speak volumes about the tobacco lobby’s power in statutory institutes and its disastrous impact on the economic and healthcare sectors. Consequently, the average price of a cigarette pack remains the lowest in Pakistan.

It is evident that the region lags behind other countries in controlling cigarette and tobacco consumption. A uniform tax system is needed at all levels to prevent tax evasion. In South Asia, the tier system provides tax evasion opportunities to tobacco companies, causing severe economic and health implications. A high uniform taxation system would push tobacco prices above the average income growth, thereby keeping youths and children away from these products. Besides, the lower-income segment of the society would not burden the national exchequer by consuming additional cigarettes, and the healthcare costs might come down. A single-tier system will also lessen the problem of illicit trade.

Besides a uniform taxation system, sweeping tax reforms are needed in Pakistan. FBR needs to be empowered to coordinate with other departments regarding tax monitoring, collection and compliance. The immense influence enjoyed by the tobacco industry needs to be curtailed by implementing laws against tobacco products in letter and spirit. Pakistan needs to levy other taxes like sin tax and value-added tax to comply with the WHO recommendations which suggest about 70 per cent tax to control the availability of tobacco products. Pakistan also needs to pass detailed legislation to ban both direct and indirect forms of tobacco advertisements.

This article was originally published at: https://www.thenews.com.pk/tns/detail/775199-using-taxation-to-curtail-tobacco-use

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