Did tobaccos deliver on taxes?

As the budgetary exercise gets underway, fiscal relief for several sectors may be in the offing. Among them is the billion-dollar tobacco industry. The industry has been under criticism from health advocates and think-tanks lately for lobbying for and getting a multi-tier FED regime that led to growing cigarette sales at lower prices. (Read ‘A case against multi-tier tobacco tax regime,’ published December 17, 2018; and ‘Illicit cigarettes: a smokescreen?’ published April 13, 2018). Meanwhile, there is no independent estimate of how many illicit cigarettes – the bone of contention- are being sold in the market

But enough about history, the government did the tobaccos that fiscal favour to secure its tax revenues, which saw a visible fall (in second half of CY16 and first half of CY17). The fiscal planners will be primarily interested in whether the three-tier regime has delivered on the fiscal front to merit its continuation.

As 2018 was the first full year to judge the tobacco’s changing fortunes post-multi-tier-regime-introduction and with the duopoly’s annual results for CY18 now published, let’s review how much the two major companies have delivered. Well, latest financials clearly show that the new FED regime has worked for both the industry and the government.

Together, Pakistan Tobacco Company (PSX: PAKT) and Philip Morris Pakistan (PSX: PMPK) constitute more than 90 percent of the formal market. Collectively, the two players produced a gross turnover of Rs173 billion in CY18, up 22 percent from CY17 – it’s the duopoly’s highest gross turnover thus far. The collective net turnover of Rs69 billion is up 21 percent year-on-year – also the highest thus far.

The government revenues have also recovered, albeit they are still shy of the peak. The duopoly’s total reported taxes – federal excise duty, sales tax and income tax – reached Rs107.8 billion in CY18, up Rs20 billion or 24 percent from CY17. Sales tax and excise duty have each risen 23 percent year-on-year whereas income tax has risen 35 percent over CY17. But total taxes remain still shy of Rs115 billion scored in CY16 (despite sales falling in much of second half).

Interestingly, despite growing government taxes from the two players, the tobacco majors are retaining more. In terms of gross turnover, excise duty collection has gone down to 20 percent in CY18 and CY17, from 23 percent in previous years. Similarly, sales tax had a 39 percent value in gross turnover in CY18 (and in CY17, too), down from 42 percent in previous years. This has led to the duopoly netting 40 percent of gross turnover, lower than 35 percent previously, as net turnover.

Clearly, there is some room for the government to raise the FED on the three-tier system without disturbing the fiscal inflows. Sources suggest that an inflation-adjusted FED hike is coming; something the duopoly would be fine with. But there is more to public policy than satisfying only the fiscal objective. The health outcomes of growing tobacco use need to be factored in, too, while facilitating tobaccos.