Evidence matters! And lack of evidence leads to poor policy decisions. That’s one of the many key findings of recent two reports on tobacco taxation re-launched in an event organised by the Karachi-based Social Policy and Development Centre late last week.
The many interesting findings of both these reports – one that deals with macroeconomic impacts of tobacco use in Pakistan (by SPDC), and the other that looks at the economics of tobacco taxation and consumption in Pakistan (by PIDE) – have been discussed earlier in this space. (See also ‘A case against multi-tier tobacco tax regime’, & ‘Scale of tax loss in tobacco’ published December 17 and 18 2018 respectively).
There is one particular aspect that draws interest. In a section that assess the impact of different cigarette tax regimes on tobacco-related outcomes such as cigarette consumption, tax revenue, and so forth, the authors of the report “assume that there is no illicit trade”. They take the officially reported cigarette production as consumption numbers for the purpose of their analyses. This may prove to be a moot point.
If the latest report by Oxford Economics (released Sep-2018) is any guide, there were about 24.2 billion cigarette sticks produced illicitly in Pakistan in 2017. These domestic illicit cigarettes (DIC) are supposed to be those that don’t meet quality standards, don’t pay taxes, and many of them don’t even have health warnings.
If that number is true, then it warrants serious attention. At an estimated price of Rs1.35 per cigarette stick, the top-line of DIC makers combined translates into about $311 million, with the bottom-line close to $70 million. Even if the DIC industry is half of what Oxford Economics estimates, it would tantamount to huge numbers considering that the Kalashnikov economy was once estimated to be around $50 million and illegal drug trade was estimated to be around $900 million in a study funded by UN Office on Drug and Crime.
This potential size of DIC in Pakistan doesn’t only have implications on tax collection, public health care expenditure, and individual health losses. If the size of this industry is indeed so big it may also have serious implications on terrorist or crime financing.
Granted the fact that Oxford Economics study was funded by Phillip Morris International, which therefore raises question marks over the independence and reliability of those estimates. But that is exactly why one needs respectable institutions like the SPDC and PIDE to come with their own independent and reliable estimates of domestic illicit cigarettes that government policymakers can and would hopefully rely on.
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