EDITORIAL: Going by FBR (Federal Board of Revenue) revenue figures, it has successfully busted the great tobacco industry myth that higher taxes mean lower returns for the government.
Hiking FED (federal excise duty) on cigarettes by a whopping 146 percent in one go has not just discouraged consumption, which is a clear net positive, it has also increased expected revenue from said item to the Rs230-240 billion range this year, a significant jump from Rs83 billion in 2017 and Rs87 billion in 2018.
That was the time of stagnating revenue collection, when the tobacco industry still had the muscle and influence to have its own theory about the tax-revenue relationship accepted as the gospel truth. There were only minor tax increases in 2020-23, but now the government has finally put its foot down and instituted the largest ever hike in cigarette taxes.
This is in line with the WHO (World Health Organisation) Framework Convention on Tobacco Control (FCTC), which identifies taxation as the most cost-effective way to discourage tobacco use.
Article 6 of FCTC states that “tax measures are an effective and important means of reducing tobacco consumption by various segments of the population, in particular young persons and low-income groups”. Indeed, there are already reports in the press about how many people have either reduced or completely turned away from smoking because of the unprecedented FED hike. But it will take a lot more time for more reliable figures to come out and provide a more realistic impact of this tax measure.
Yet, be that as it may, it’s also true that increasing taxes on cigarettes, no matter how small or large the magnitude, immediately fuels the illegal black market that thrives on smuggled cigarettes and other contraband.
That’s where neither FBR nor security agencies have ever enjoyed too much success. It’s too soon to tell about the real impact of the new tax measure, of course, but if history is any guide, official statistics will hype the positive impact while people on the ground will be forced to buy cheaper and inferior cigarettes that cause much more severe health problems and also hurt the exchequer.
FBR’s best bet to check smuggling was the much-hyped track-and-trace system. It was only last month, however, that authorities seized 16 million non-duty paid/counterfeit cigarette sticks in “429 raids across the country”, which meant that the system had completely failed. And it’s not likely, to say the least, that some revolutionary change would have plugged all the loopholes in just below 30 days.
Therefore, it is important to consider the complete picture. It is desirable to discourage smoking, no doubt, and if higher taxes get the job done, then so be it.
But, if in reality, those higher taxes only push people with limited spending capacity towards smoking inferior, illegal and often far more hazardous brands, then it is by no means a success or something to celebrate. Hopefully, the government would have factored this in, and the unprecedented FED rise will not end up putting more pressure on the healthcare system while inflating the black economy.
Copyright Business Recorder, 2023