Pakistan needs clear tobacco taxation policy to boost economy

ISLAMABAD: Tobacco taxation has received little recognition, despite numerous benefits it could bring to revive the ailing economy of Pakistan. Bringing the entire tobacco industry under a proper tax net can invigorate the nation’s financial stability and curb the use of harmful tobacco products.
Syed Ali Wasif Naqvi, Senior Research Associate at Sustainable Development Policy Institute (SDPI), told WealthPK that a clear tobacco taxation policy was needed to boost the revenue and improve the economy.
He said the government’s failure to implement a fair tax system that addresses the needs of the country can result in a detrimental cycle of borrowing to bridge the gap between revenue and expenditure. He added that this undermines the state’s ability to allocate resources towards crucial areas such as health, education, and infrastructure, ultimately impacting the overall welfare of the nation.
“The staggering number of smokers in Pakistan has surpassed 31 million, leading to 466 deaths per day due to tobacco-related illnesses such as lung disease, heart disease, various types of cancer, and diabetes,” Naqvi said.
He said the economic toll of smoking in Pakistan stands at Rs615 billion, which is equivalent to 1.6% of the country’s gross domestic product (GDP). However, despite this cost, only 20% of the revenue generated by the tobacco industry is collected, he added.
The researcher said the Federal Board of Revenue (FBR) and provincial tax authorities have focused on collecting taxes on goods and services instead of increasing taxes on income and assets, leading to a significant portion of the poor’s income being taken away.
The researcher highlighted that in fiscal year 2021-22, sales tax was the top revenue generator for the FBR, accounting for 41% of the total tax collection. However, he added that slow growth and the rapidly expanding informal economy have caused a decline in the tax-to-GDP ratio.
He stated that despite efforts to broaden the tax base, the FBR primarily relies on adjusting tax rates and further collections from existing taxpayers.
Naqvi highlighted the inadequate implementation of a track and trace system, which results in evaders going unpunished and undermines the trust of those who do pay their taxes. The researcher also mentioned that tax incentives are often extended to entities with limited potential for contributing to export-led growth. He said that the orthodox approach taken by policymakers has prevented the full utilisation of the tax potential of industries such as tobacco.
Naqvi said only two tobacco companies pay 98% of the total tobacco tax, and hold 98% of the market share, while the remaining 40% of companies contribute a mere 2%. He went on to say that the volume of illicit cigarette trade in Pakistan has been rapidly increasing over the past few years, and added that it has grown from 23% in 2018 to 34% in 2019, and 40% by 2020. This increase, he said, is due to inconsistent taxation policies and inadequate revenue collection mechanisms for the tobacco industry.
He cited the World Health Organisation’s recommendation of a 70% tax on cigarettes and mentioned that though the government increased the tax last year, Pakistan is still far from reaching this target.
To illustrate his point, Naqvi cited the example of Sri Lanka, stating that their success in generating revenue from the tobacco industry is due to their efforts in eliminating or minimising the untaxed segment. He emphasised that policymakers and legislators need to address the illicit markets that are eroding government revenue.
“The federal government’s recent imposition of Rs36 billion in taxes on cigarettes and Rs2 billion on tobacco processing in the second quarter of this fiscal year has resulted in an increase in the price of tier-1 brands by Rs30 and tier-2 brands by Rs20,” he mentioned.
The researcher highlighted the need for a comprehensive approach to tobacco taxation that goes beyond just tax policy. This approach should include trade policy, health policy, and provincial policy to effectively address the issue of smoking in Pakistan and its impact on public health and government revenue.
“The implementation of trade and health policies, such as limiting the supply of tobacco products and implementing text and pictorial health warnings, would help reduce the harm caused by smoking, prevent initiation, and increase government revenue,” he said.
Involving provincial health departments and revenue authorities in the process would help ensure the success of the comprehensive approach to tobacco taxation, he added.
Abdul Wahid Uqaily, the Head of Track and Trace at the FBR, told WealthPK that the illicit tobacco trade in Pakistan remains a significant challenge. He said the FBR is taking a proactive approach by reinforcing its taxation policies on tobacco companies to curb the growth of illegal cigarette sales.