In a bid to discourage the use of tobacco in Pakistan, having one of the largest populations of tobacco users in the world, leading economists, foreign experts and tax officials proposed a high uniform specific cigarette excise tax in the forthcoming budget 2014-15. The speakers, while addressing the launching of a report: "The Economics of Tobacco and Tobacco Taxation in Pakistan," here on Tuesday recommended a high uniform specific cigarette excise tax, as the move would significantly raise cigarette price and would reduce tobacco use.
The ceremony was addressed by Khurram Hashmi, National Co-ordinator, Coalition for Tobacco Control, Shahzad Alam, National Program Officer World Health Organisation, Dr Fouad Asalm, Technical Officer, The Union, Mazhar Arif, Executive Director, Society for Alternative Media and Research. The report is a joint effort of leading economists, foreign experts and input of tax officials on tobacco taxation in Pakistan.
The cigarette tax structure in Pakistan is complicated, with a tiered structure that imposes different excise taxes based on retail cigarette prices. Until 2013, the system was comprised of a specific tax applied to low priced cigarettes, an ad valorem tax levied on high priced cigarettes, and a combination of specific and ad valorem taxes applied to mid-priced cigarettes. The tax system was simplified in the 2013-14 budget - ad valorem taxes were eliminated and three tiers were collapsed into two, although the gap in tax between the lower and the higher tier is still substantial. Cigarette excise taxes in Pakistan account for just over half of final cigarette prices paid by consumers on average, while total taxes on cigarettes account for almost two-thirds of final prices. This is below the level in countries that have taken a comprehensive approach to reducing tobacco use, where taxes account for 70 percent or more of price, and the excise tax share is below the 70 percent level recommended by the World Health Organisation, the report said.
It has been proposed that the current tax structure that applies different tax rates on cigarettes based on retail price simplifies the more complex mixed system used in prior years, but continues to result in relatively low prices for the majority of cigarette brands and large differences in prices between high and low priced brands, as a consequence of this increases in cigarette tax rates will have less impact on public health than they would if a single uniform specific tax was applied to all cigarettes, since the large price differences continue to create an incentive to switch down to cheaper cigarettes in response to tax increases.
According to the report, replacing Pakistan's tiered excise tax structure with a uniform specific tax on all cigarettes would eliminate opportunities for tax avoidance through misclassification or repositioning of brands and send the clear message that all cigarettes are equally harmful, while reducing the incentives for substitution to less expensive cigarettes in response to a tax increase. By raising prices, this tax increase will prevent cigarette smoking initiation, promote cessation, lower consumption among continuing smokers, and reduce the death, disease, and economic costs that result from smoking. The recent switch to a two-tiered specific system is an important first step in simplifying taxes. However, given the fact that tobacco excise taxes continue to be lower for the majority of brands in the market compared to the equally harmful but higher priced brands, an increase in the lower tier tax will be important in the medium term as an intermediate step towards equalising taxes at a uniform, higher level.
The report proposed that implement annual adjustments to tobacco tax rates so that they retain their real value over time and are not eroded by inflation. One caveat associated with the proposed uniform excise tax on cigarettes recommended above is that the real value of this tax will be eroded over time by inflation. In Pakistan, despite periodic increases in cigarette tax rates and increases in the price tiers to which they apply, real cigarette price have fallen for much of the past 20 years. These falling real cigarette prices result in higher levels of cigarette consumption, together with its health and economic consequences. Annual or more frequent adjustments of the proposed uniform specific cigarette tax will maintain its real value over time which will maximise the public health and revenue impact of the tax.
The report proposed that implement annual adjustments to tobacco excise tax rates so that they result in increases in tobacco product prices that are at least as large as increases in per capita incomes. New evidence provided in this study clearly shows that cigarette demand in Pakistan rises with income. For much of the past two decades, the combination of falling real cigarette prices and rising incomes has led to cigarettes becoming much more affordable in Pakistan. This increasing affordability resulted in more cigarette smoking than would have otherwise been the case. In addition to raising taxes to offset the effects of inflation, further increases in excise taxes that reduce the affordability of cigarettes are needed in order to improve public health by reducing smoking.
The report further recommended that increase taxes on other tobacco products to be equivalent to cigarette taxes and to reduce the use of these products. Equating taxes on all tobacco products reduces incentives to substitute from higher taxed products to lower taxed products, maximising the health and revenue impact of these taxes. Specific taxes on these products should be annually increased so that they keep pace with inflation and do not fall in real terms over time. In addition to indexing, tobacco taxes should be regularly increased over time, with the long run objective of tobacco excise taxes accounting for at least 70 percent of average prices, as recommended by the WHO. Once that goal is achieved, subsequent increases should be adopted that are sufficient to further reduce the affordability of tobacco products.
The report recommended that strengthen tobacco tax administration, increase enforcement, and tax duty free sates of tobacco products to reduce tax evasion and avoidance. Tax avoidance and tax evasion in Pakistan cost the government revenue and adversely affect public health. As called for in the recently adopted Illicit Trade Protocol to the WHO Framework Convention on Tobacco Use, several steps should be undertaken to strengthen tobacco tax administration in Pakistan. First, a well-established monitoring system should be put in place that employs new technologies for monitoring the production and distribution of tobacco products. These new technologies include adoption of a state-of-the-art production monitoring system; the new generation of more sophisticated, hard to counterfeit tax stamps; and a tracking-and-tracing system that can follow tobacco products through the distribution chain. The government's initial investment in these technologies would almost certainly more than pay for itself through the revenues collected on products for which taxes would otherwise not have been paid.
Pakistani tax administrators' capacity for tracking and tracing should be further strengthened by licensing all involved in tobacco production and distribution and resources should be allocated to enforcing tax policies. All taxes should be applied to tobacco products sold in duty free outlets. Doing so increases the public health impact of higher tobacco taxes by raising all tobacco product prices and by reducing opportunities for tax avoidance and evasion, while at the same time generating additional revenues.
At the same time, cigarette prices in Pakistan are among the lowest in the world, and real cigarette prices have been falling and increases in income have made cigarettes increasingly affordable over much of the past two decades. These trends, however, have seen reversals in recent years as cigarette taxes have been increased, raising real cigarette prices and reducing the affordability of cigarettes.
Based on existing and new estimates, the report modelled the impact of changes in the existing tax structure and rates. Eliminating the tiered tax structure and adopting a uniform specific excise tax of Rs 31.2 per pack of 20 cigarettes, so that the cigarette excise tax would account for 70 percent of final prices as recommended by WHO would raise average prices by over 15 percent and reduce cigarette consumption by 7.5 percent. In addition, this tax and price increase will lead over one-half million current Pakistani cigarette smokers ages 18 and older to quit smoking, while preventing almost 725,000 Pakistani youth under 18 from taking up cigarette smoking. Together, these reductions in smoking will prevent over one-half million premature deaths caused by tobacco use in the current population cohort. At the same time, because of the inelasticity of cigarette demand, the tax increase will generate over Rs 27 billion (US $0.3 billion) in new cigarette tax revenues. A larger tax increase - one that taxes all brands at Rs 44 per pack of 20 cigarettes - would have a much greater public health impact, while generating even higher revenues, suggestions added.
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