Laffer says tobacco industry faces ‘critical’ challenge of dealing with non-tax paid cigarettes

ISLAMABAD: Renowned American economist Arthur Betz Laffer stated that the tobacco industry in Pakistan faces a critical challenge of dealing with wide presence of non-tax paid cigarettes.

In a recent interaction with reporters on tobacco taxation here at Islamabad, Laffer said that the implementation of the Track and Trace System in Pakistan is only possible after checking the menace of illicit cigarettes in the country.

He also presented a global comparison of tobacco taxation by various tax jurisdictions and its implications on the revenue collections and illicit trade/smuggling.

He said that the legal cigarette industry of Pakistan comprises two multinational companies that contributing 98 percent of the cigarette excise revenue despite, a market share of only 60 percent.

On the other hand, the non-tax paid cigarettes produced by 52 local manufacturers, which has a market share of over 40 percent but contributed only two percent to the national exchequer.

He said that as excessive tax policies widen, the price gap between legal and tax-evaded cigarettes, and with low disposable income.

Laffer, who remained an economic advisor to Donlad Trump, explained that the consumers of legal cigarettes will be unable to absorb multiple tax and price increases and will shift their consumption to cheap illicit cigarettes making the task of enforcement against these illicit operators increasingly difficult.

According to DrLaffer, taxes are bad for economy and growth, adding, taxes hurt the country’s prosperity.

In high tax environments, tax exempt activities flourish. The illicit tobacco sector is flourishing and will keep on doing so as long as we see taxes rise in Pakistan.

We see this in several sectors but perhaps the revenue lost in this sector is the highest, he said.

He said that the tobacco and beverages are being taxed at the maximum level in Pakistan.

This year, the government is collecting probably 150 billion from tobacco taxes, compared to 137 billion last year.

Laffer stated any increase in taxes will result in an increase in illicit activity – if the FED increases then down trading will occur and more legal volumes will move to illicit, so it is a loss–loss for both the GOP and the private sector.

However, due to the tax increase hiatus, the legal tax volumes are returning – that is the main reason that government revenue from the tobacco industry is increasing.

Still not at the level it could be and that is why Pakistan should not increase the taxes to ensure that legal volumes return and government revenue increases.

He concluded with a solution that there is a need to improve enforcement capabilities within the country to curb illicit activity.

He suggested that in the short-term till the capabilities catch up, taxes should remain stable (increase in tax will only increase down-trading).

The long-term focus needs to be on enforcement capabilities.

Tax stamps one of those capabilities but we need more solutions such as these.

It is a good starting point but Pakistan cannot stop there.

He stated that the implementation needs to be on all companies not just the two major players – otherwise, the GOP is only increasing production costs of two companies but with so many illicit players selling under the legal selling price, the country is playing a losing game.

However, on its own it is not a complete solution – political will to enforce and take action against the illicit players also needs to be present.

Before more innovative solutions are proposed and rolled out, political will to fight against illicit needs to be there, Laffer added.

Copyright Business Recorder, 2021