Pakistan, India and Bangladesh: experts find cigarette tax structures complicated

All three regional countries (Pakistan, India and Bangladesh) have complicated excise tax structures - India levies excise duty based on the length of cigarettes, Bangladesh on the final price of cigarettes and Pakistan on the VAT exclusive price.
When contacted, Rajeev Cherukupalli, an economist at the Johns Hopkins Bloomberg School of Public Health gave regional comparison of excise tax structure on cigarettes. He told Business Recorder that Pakistan, India and Bangladesh still have complicated excise tax structures. Pakistan has some of the lowest cigarette prices in the world - even by adjusting purchasing power differences. The Philippines witnessed in a similar situation for years, with four different tax slabs and a large economy whereas cigarette market carried very low excise duty. But they now have a roadmap in place, which will encompass all cigarettes carrying a uniform excise tax per pack by 2017, expert on tobacco sector added.
Khurram Hashmi, National Co-ordinator, Coalition for Tobacco Control, said that tax structure in Pakistan, despite the changes, during the last decade has not made a prominent effect in the consumption levels. The suggestions made would all be good if the end result was a reduction in the overall consumption. The ad valorem taxes can be very beneficial but these would require very complex implementation. Furthermore, Ad valorem taxes have the advantage of maintaining their real value when price rises with inflation.
Khurram observed that a uniform taxing policy may also be a good option as it would simplify the tax process and bring more transparency to the tax system. Whichever tax system is implemented, it should make a substantial difference in the price of cigarettes, so the main goal of reducing overall tobacco consumption to be attained.
Referring to a report, he said that in the case of Pakistan, higher tax incidence may not mean lesser demand of cigarettes. It may merely fuel growth of duty-non-paid sector as consumers switch to cheaper duty-evaded options. This is not unique to Pakistan and data from many developed countries with high compliance levels shows similar results. In case of increase in share of duty-evaded sector, the annual loss to Government of Pakistan exchequer through sale of duty-evaded cigarettes will increase from the present Rs: 20-25 billion. This could also hamper efforts to promote criminality (smuggling, counterfeit, duty evasion, etc). Unless the duty-non-paid sector is substantially controlled, there is not much chance of higher tax incidence reducing demand of cigarettes in Pakistan.
When contacted, the Caroline Renzulli International Communications Campaign for Tobacco-Free Kids said that the recent Article 6 guidelines adopted at the Conference of Parties (CoP) clearly state that simple tax structures are much more efficient and effective than more complex systems and recommends a uniform specific tax structure as the most effective at reducing tobacco use and efficient to administer, she added.
Another local tax expert was of the view that cigarette excise duty structure in South Asia region including India, Pakistan and Bangladesh are relatively complicated and reflect the different market dynamics in various countries. Multiple categories (brands) of cigarettes are subjected to multiple rates of excise, with the simplest excise regime being in Pakistan with only 2 price categories and a specific amount of excise levied on each price (brand) category.
India and Bangladesh have relatively complicated excise tax structures. India levies different taxes based on the length of cigarettes, Bangladesh based on the final price of cigarettes, and Pakistan based on the value. This means that making a direct comparison of the excise duties by itself is not always useful. There is need to look either at average excise rate on cigarettes as a whole, or the effective tax on a representative (most popular) brand in all three countries, he said.
Based on data compiled in 2012 by World Health Organisation the cigarette prices of most popular price category used to be in the range of US$ cents 35 (Pakistan), 61 (Bangladesh) and 1.76 (India). In 2012 the share of excise duty in the final price of those particular brands was 46 percent, 56 percent and 27 percent respectively. The total tax burden, however, on cigarettes was higher than this it included VAT or sales tax also in one form or the other, although this is applied to most products and not cigarettes alone. Again, the tax incidence on higher priced brands was higher than this, which in the case was Pakistan goes up to 65%. Since 2012 cigarettes prices in each of these countries have increased considerably driven by annual inflation, increase in tax rates, and also changes in VAT/Sales tax. The fact still remains that tax incidence in Bangladesh and Pakistan is higher than in India.
They added that such differences in excise and tax structures are normal as tobacco taxation policy has to take into consideration multiple factors. These factors include the need for reliable revenue flows for the government, the propensity and opportunity for consumers to purchase from alternative sources, the tax bearing capability of different product categories, the cross border price gaps with neighbouring countries, and above all the levels of illicit trade in a market. The most critical factor that determines the tax and price in cigarette sector, however, remains ability to government to ensure compliance with its tax regime. Where a huge grey market in the form of cheap duty-evaded cigarettes exists, as is the case in Pakistan, consumers have alternatives to the expensive duty-paid brands which undermine tax increases and only serve to shift supply from tax-paid to illicit sector.
As long as such duty-evaded cheap cigarettes are available, it is evident that for a given tax increase, consumption may not fall as much as it could have - basically because there are enough alternatives for consumers. This is especially true for Pakistan where a large duty evaded sector is operating with cigarette brands being offered at prices as low as 1/3rd of the tax paying brands. Increasing tax burden thus does not impact cigarette consumption as it only accelerates consumption shift to cheaper duty evaded brands. At present the duty evaded cigarettes are estimated to comprise over 1/5th of the tobacco market, which has caused huge loss to Government of Pakistan tax revenues over the last 5 year period. Thus enforcement of tax regime is the single most critical factor that could help increase cigarette prices and allow more tax collection from the sector though introduction of simpler tax regime without multiple price and tax categories. Without curtailing this illicit sector providing alternatives to consumers, it may not be possible to move towards single specific tax rates in Pakistan, as has been done in some developed countries, they added.