EDITORIAL: In a highly troubling development, one of the oldest multinational companies (MNCs) operating in the country, British American Tobacco (BAT), has warned that it is considering wrapping up its operations in Pakistan if there are any further tax hikes on cigarettes in the upcoming budget.
BAT has been operational in this part of the world for well over a century, and if it exits the local market, this will be the second such departure of a renowned MNC in recent times, after the oil conglomerate Shell made a similar decision last year.
BAT’s dire warning speaks volumes about the dismal state of the economy and collapsing foreign direct investment (FDI) figures, as not only has it become increasingly tough to invite FDI into the country, retaining the existing foreign investor base is also turning into a tall order.
As BAT has highlighted, existing taxation – which include sales tax, federal excise duty (FED), income tax – has already led to a 38 percent nosedive in its cigarette sales, impacting profitability, while also increasing the size of the illicit tobacco sector to 58 percent of the market. Instead of controlling cigarette consumption, the excessive level of taxation – specifically a 73 percent increase in FED in real terms over the last two years – has instead led to a situation where the sale and smuggling of cheaper, illicit alternatives has soared.
On top of that, the failure of the relevant departments and law enforcement agencies to put an end to this rampant smuggling, as well as the utter inability of the much-hyped track and trace system to combat the counterfeit tobacco trade have all combined to create a perfect storm, with there now being huge question marks on the sustainability of the regulated tobacco sector.
The government’s woeful role here has seen it fail to bring the huge majority of tobacco manufacturers into the tax net, with only two foreign and a handful of local manufacturers paying taxes. In addition, much of the supply chain of tobacco production, from tobacco cultivation to the point that it reaches the manufacturers, largely lies outside the tax net as well.
And in classic Pakistani fashion, instead of instituting effective measures to bring more entities into the tax net, existing taxpayers are being forced to pay more than their fair share, with proposals now being floated to further increase the FED on tobacco in the upcoming budget, never mind assertions from the regulated tobacco sector that additional increases under this head could actually reduce revenues generated from the segment in the next fiscal year.
It would be pertinent here to note the stark contrast of the state of FDI in Pakistan with that prevalent in India. In recent years, foreign investors have been making a beeline into that country, with existing foreign investors also increasing their capacity.
Numerous global manufacturers looking to exit the Chinese market due to an unfavourable geopolitical environment are eyeing India as a profitable alternative, with companies as varied as Apple, Taiwan’s TSMC, a leading semiconductor chip manufacturer, and DHL making substantial forays into the Indian market.
In Pakistan, on the other hand, we see a complete lack of will, ability and competence on the part of government departments to enforce the law and execute policies that would facilitate foreign investors, expand the tax net and crack down on the sale and smuggling of illicit products from a variety of sectors, and not just tobacco.
Added to this is the failure to identify the consequences of flawed macroeconomic policies. With Pakistan recording its lowest investment-to-GDP ratio in 50 years during 2023-24, we are sure to break more such unwanted records in the coming years unless the government gets a grip on a fast-deteriorating situation.
Copyright Business Recorder, 2024
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