It’s too early, but the PTI government is getting a bit of reputation for “compromise”. The mini-budget, released last week, contained a few unsavory accommodations (read: Non-filers: mini-budget, mini-solutions, published September 24, 2018). The mini-budget also staked out a middle ground for the tobacco industry. Caught between conflicting interests of tobacco billions and public health, the government took a fiscal approach that goes in the right direction yet doesn’t reach far enough.
On the negative side, the government has decided to continue with the multi-tier tobacco FED regime, which was introduced by the PML-N government in May 2017. The third-tier’s introduction had the effect of making cigarettes cheaper in the formal market – the effect has been captured in the CPI data – as cigarettes started retailing below Rs58.5 a pack, an affordable entry price-point for youth to start smoking.
Several non-profits have since been up in arms against the third tier, arguing that the fiscal move had made tobacco companies competitive at the expense of public health. Top tobacco companies have indeed done well since, ramping up cigarette production and turning around their financials. In 1HCY18, for instance, the dominant duo of Pakistan Tobacco and Philip Morris saw their net turnover jump by a yearly 50 percent and 83 percent, respectively. Their net profits jumped by an even larger magnitude.
Anti-tobacco activists had pinned high hopes on a premier whose claim to fame included a cancer-treatment hospital. But there is some cold comfort for the former. The government has raised the FED on the three tiers through the mini budget, as implemented through the FBR’s SRO 1150 (I) 2018 issued on September 18.
Cigarettes retailing above Rs90 per pack (tier-1) would now carry an FED of Rs90 per pack – a 13 percent or Rs10.6 increase over previous FED. Cigarette packs with retail price below Rs90 but above Rs58.5 (tier-2) would carry an FED of Rs36.8, 4 percent or Rs1.28 higher than before. For tier-3 (packs retailing below Rs58.5), FED has been raised to Rs25 per pack, up 46 percent or Rs8.
The above fiscal adjustment seems like an exercise in finding a win-win for the tobacco industry and the public health activists. The FED hike (except for tier 2) is larger in magnitude than what the PML-N government had ordered in its last budget presented in April 2018. Critics can still charge that the third tier hasn’t been abolished, ostensibly to keep the tobacco majors happy.
But consider: the raise in FED to Rs25/pack may make tier-3 unattractive for cigarette manufacturers, who will retain less of the retail price now. It is intriguing that the government has only marginally raised the FED on tier-2. Is it to motivate manufacturers to move some of their best-selling brands to tier-2 from borderline tier-3?
If that happened, cigarettes would effectively become dearer. The companies’ financials, overall cigarette production statistics and the relevant CPI reading for 4QCY18 will tell whether the FED hike had the intended effect on tobacco control in the country. Let’s wait and watch.
Meanwhile, the current FED regime has made the middle-tier look so attractive that a pack of Marlboro may net/retain the selling company a better price if it was sold in tier-2 instead of tier-1. But, of course, the price of a global, marquee brand cannot be drastically lowered to benefit in the short-term from a tax regime that is capricious at best.