LAHORE: Health tax to be levied on the tobacco industry, being lobbied for by the anti-tobacco sector, is destined to have a serious negative effect on tax collection from the tobacco sector in Pakistan.
According to the world renowned research institute, Oxford Economics, the tax evaded cigarette sector share stands at 37.6 percent currently, primarily due to a 93 percent excise rate increase in the past 18 months; this did not cause a substantial decrease in tobacco consumption in the country. Due to this unprecedented increase in taxation, the tax evaded cigarette sector share rose from 33 percent to 37 percent causing the government to incur losses of more than Rs70 billion during this period.
The unregulated sector takes immense advantage of increased taxes on the regularized tobacco sector. They have been selling a 20-cigarette pack at Rs25-40 for the past 8 years and will continue to sell at the same price point even if health tax is levied. The price point at where these cigarettes are being sold are below the minimum applicable taxes of Rs44.25 and below the minimum price of Rs62.75 per pack set by the government; a violation that till date anti-tobacco lobby has failed to acknowledge, said the sources from the tobacco industry.
According to the statement of the Ministry of Finance, 3 million people have lost their livelihood due to the novel coronavirus; the poverty level has increased to more than 33 percent over the past year. Inflation levels which have reached double figures have stretched consumer spending power, far-reaching impacts may lead the consumers to shift to tax-evading cigarette brands.
Levying health tax on regularized cigarettes will not help achieve the desired objectives and instead would cause a downshift by the consumers to tax-evading cigarette brands. According to PricewaterhouseCoopers (PwC), one of the worlds-leading consulting firms, a shift of consumption towards duty not paid cigarettes will likely cause the government to fail to meet revenue targets from the tobacco sector.
The 2019 policy change of removing the 3-tier tax system on tobacco sector has led to a loss of 6.5% in government revenues from them and boosted market share of local non-tax paying tobacco companies. Any increase in FED or other duties not only leads to a loss in the government exchequer revenue but also shifts the consumer to the low-quality tax evaded cigarettes which are more harmful to health. A change in taxation will only cause the government to end up achieving neither the fiscal nor the health agenda of the country.
Copyright Business Recorder, 2020