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What’s in a name? Apparently a lot! Reportedly, the federal government is planning to impose a “sin tax” on cigarettes and beverages. The use of the term ‘sin’ has apparently roiled retailers’ sentiment – particularly hurting one ‘All Pakistan Cigarettes and Cold Drinks Retailers Association’ (yes, such an org exists). But the proposed measure merits a serious look beyond the unfortunate syntax (pun intended).

If news reports are to be believed, the federal health ministry’s proposal is to levy sin tax of Rs10 on each cigarette pack and Rs1 on each beverage bottle sold in the country – and to use the proceeds on federal healthcare schemes.

Question is: will the new levies drive a behaviour change in the desired direction? High taxes on addictive substances and unhealthy foods & beverages have resulted in beneficial behaviour change in some markets overseas. But in this particular case, the tax levy hardly qualifies as shock enough to encourage oneself to abstain from smoking tobacco and drinking fructose – nor it looks discouraging enough for first-time users.

In the case of soft drinks, the price hike – ranging from 1 percent to 5 percent per bottle, depending on the type, quality and origin of the beverage – will be barely noticeable for consumers. For cigarettes, the impact may not be felt by consumers, except for those consuming tier-III cigarettes, which retail below Rs58.5 a pack. Even in that low-income segment, the price hike will be at or below 10 percent. Will that produce enough of a moment to pause and reflect on part of a regular consumer?

On the other hand, the government will raise tens of billions of new taxes in a time of fiscal distress. Take the tobaccos first. Roughly 60 billion cigarettes were produced by local cigarette manufacturers in FY18, as per data from the Pakistan Bureau of Statistics (PBS). That translates into three billion cigarette packs of 20 smokes each. With a sin tax of Rs10 per pack, the proposed measure will raise the government at least Rs30 billion per annum (likely more if imported cigarettes are also accounted for).

As for the sugary beverages, the tax haul will be lower but still significant, of at least Rs10 billion per annum. As per PBS data, close to 4 billion liters of soft drinks and juices were sold in Pakistan in FY18. Multiplying that with a factor of 2.5 to 3 in order to account for small-bottle sales will yield between 10 and 12 billion sugary beverage bottles sold every year. The proposed tax is one rupee per bottle.

So, collectively, the sin tax will yield at least Rs40 billion – about 1 percent of the federal tax revenues in FY18. Though it’s not a lot, but at the FY18 fiscal deficit level, the new taxes can contain the fiscal slippage by about 12 basis points. And if the idea is to gradually raise the sin taxes by Rs10 and Rs1 respectively over five years, then this levy will become another fat levy on the FBR scorecard by 2023.

But all those numbers depend on the tax jurisdiction. Since the federal health ministry has mandate only in Islamabad Capital Territory and the federally-administered areas; will the sin tax be imposed just in those areas? Or will it be extended across provinces, too? If it is the latter, will the taxes make their way to the federal divisible pool to satisfy the provincial share? And if it’s only a tax for federal-administered areas, will its limited scope (7mn residents; 3% of population) not render it ineffective from the get go?

Arguably, a sin tax is not a sign of a state’s strength or wisdom. Quite the contrary, it is a sign of a state’s weakness, whether at home or abroad. It is an implicit acceptance that while a state views a certain product or act as a ‘sin’ (or in non-religious expression a ‘wrongdoing’) that costs the society long-term physiological, social and economic harm; but the state is too weak to ignore short-term revenues flowing from it, and too weak to withstand corporate lobbying against banning it.

That said; the higher the sin tax, the greater the reflection of a state’s strength and wisdom. But a very high sin tax, on the other hand, may encourage use of cheaper and sub par smuggled products in a country like Pakistan – further complicating a holistic policymaker’s quandary. The government perhaps needs to also look at non-fiscal ways for behavior change – including but not limited to awareness campaigns at schools and colleges, so that kids and teenagers can avoid unhealthy temptations early on.

Copyright Business Recorder, 2018

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