Tax collection from cigarette industry: PTB for carrying out detailed assessment of revenue impact after pictorial warnings

Pakistan Tobacco Board (PTB) has requested the Ministry of Finance to carry out detailed revenue impact on sales tax/federal excise duty collection from cigarette industry in 2014-15 after introduction of pictorial health warnings size up to 85 percent of the cigarette packs.
It is learnt on Monday that PTB has elaborated the negative impact of increase in health warnings on cigarette packs, informing the Finance Ministry that the introduction of excessive 85 percent health warnings on cigarette packs will negatively impact demand for such cigarette packs and increase sale of illicit/smuggled cigarettes in Pakistan.
According to the PTB, the livelihood of more than 75,000 farmers who grow tobacco in Pakistan is at great risk due to the recent announcement made by the Federal Ministry of Health Services, Regulation and Co-ordination to increase the size of pictorial health warnings on cigarette packs to 85 percent. As explained, without Commerce Ministry intervention with the Ministry of Health and above all with the Ministry of Finance, this matter will not be resolved and farmers who have come and placed their concerns before it on the issue would remain perturbed.
The tobacco farmers produce nearly 100 million kilograms of tobacco every year. These farmers earn more than Rs 15 billion annually, which is source of livelihood for more than 300,000 people. The multiple economic contributions that flow from cultivation of tobacco in Pakistan have been well documented in research. These include generation of livelihoods for more than one million people and contribute more than Rs 100 billion as tax revenue to Government of Pakistan yearly.
Introduction of excessive 85 percent health warnings on cigarette packs will negatively impact consumer demand for such cigarette packs but that does not means that it is also going to reduce smoking prevalence in Pakistan because consumers are just going to switch to easily and openly available substitute non-compliant packs that are smuggled into Pakistan from across the border. Already approximately one out of every four cigarettes sold in Pakistan is illicit. Every year Government of Pakistan suffers a loss of more than Rs 20 billion due to sale of illicit cigarette packs in Pakistan, PTB said.
If the new measure is indeed implemented, it will only increase inflow of such non-compliant packs from across the border, making Pakistan a paradise for smugglers, create more work for customs enforcement departments, criminalize a legal trade, and support growth of non-documented informal economy. This will also mean that the annual loss to national exchequer will increase substantially as more consumers will switch to non-compliant cigarette packs.
The net result will be substantial decrease in the revenue contribution by the legitimate and compliant cigarette industry in Pakistan. Thus the projected revenue contribution of more than Rs 100 billion by the legitimate cigarette industry in Pakistan during the current fiscal year will decrease substantially. This will mean an increase in the budget deficit, making Pakistan more dependent on foreign aid and loans, and also create problems for Pakistan's recent commitments made to IMF to increase local tax generation, PTB said.
Above all, if the proposed measures are indeed implemented the demand for local tobacco crop grown by the farmers in Pakistan will reduce putting their livelihoods and their economic survival at risk. In case of tobacco this becomes all the ecumenically dependent on its cultivation and these farmers have few alternatives as source of income and economic well-being.
It is also critical to point out that most of these areas in KP province are already under many other economic pressures as a result of adverse law and order situation. PTB said the most critical negative consequences of the policy decision will be that it will support tobacco growers and tobacco farmers of other countries from where non-compliant packs will start coming into Pakistan in much larger scale than today. This measure evidently, but unfortunately, supports tobacco growers and tobacco farmers in other countries at the cost of tobacco farmers in Pakistan.
The measure is being proposed by the Ministry of Health without consulting any of the multiple stakeholders that would be impacted negatively by the move, with the most critical stakeholders being the Ministry of Commerce. It is interesting to place of record that the Ministry of Health had in 2009 already set up an Inter-Ministerial/Steering Committee for Tobacco Control, formed under Article 4(2) and 4(4) of the FCTC. This Committee comprises representatives of key stakeholders from Ministries of Finance, Revenue, Commerce, and Interior. The objective of setting-up this Committee was to ensure broad-based consultation and deliberation on all such measures. It is trite that this proposed measure should have been placed by the Ministry of Health before that very Committee for deliberation and recommendation.
In view of the foregoing, PTB has recommend that Ministry of Finance may be requested to conduct detailed revenue impact of the proposal to arrive at proper understanding at its overall impact on increasing budget deficit, dependence of our nation on foreign aid and loans, and Pakistan's financial commitments to IMF. Secondly, Ministry of Health may be requested to immediately rescind this regulation and instead bring the matter before the aforesaid Inter-Ministerial/Steering Committee for Tobacco Control already in place since 2009 to deliberate and recommend more sensible solution; and Ministry of Commerce should also take up the matter with all Ministries that are members of the Inter-Ministerial/Steering Committee for Tobacco Control and all policy proposals must first be brought to this Committee so that proper deliberation and consultation takes place and no unilateral decisions of the sort is taken in future as such whimsical policy making deters foreign investment in Pakistan, PTB added.