Health ministry wants higher taxes on tobacco firms

Believes step will give boost to government revenues

ISLAMABAD: In a bid to counter growing health risks and give some boost to state revenues, the Ministry of National Health Services, Regulations and Coordination has suggested to the government to increase taxes on tobacco companies in the upcoming budget for fiscal year 2018-19.

The ministry believes not only the tobacco companies have benefited from a reduction in cigarette prices, but pharmaceutical firms have also got heavy revenues by treating the consumers harmed by cigarette smoking.

In the budget for 2017-18, the ministry had sought an increase in cigarette prices with higher taxes, but the government instead cut the taxes by introducing a third slab of federal excise duty. This initiative, people believe, has pushed up the number of smokers and production of cigarettes in the country. Taxes on tobacco are considered the most effective way of bringing down its demand and boosting government revenues. These also help save money through lower health care costs.

According to a study of the World Health Organisation, a 10% increase in tobacco prices will restrict its consumption by up to 8% in low and middle-income countries.

The Ministry of Health, in a letter to the Federal Board of Revenue (FBR), recalled that prior to the FY18 budget, the ministry had proposed a tax of Rs44 per pack on the lower slab of all brands of cigarettes.

The proposal was based on a research study on tobacco taxes in Pakistan conducted jointly by the FBR, World Bank, University of Toronto, Johns Hopkins University, University of Illinois, Chicago and Beaconhouse National University.

According to the study, a uniform excise tax of Rs44 per pack of 20 cigarettes could reduce the number of smokers by 13.2%, increase tax revenues by Rs39.5 billion, reduce by 0.65 million premature deaths caused by smoking and prevent 2.55 million youth from starting smoking. Apart from these, the tax measure will help curb illicit trade in tobacco products.

However, in the Finance Act 2017, the government inserted a new tax slab with reduced excise duty of Rs16 per pack. According to the FBR, the third tier was introduced to tackle the sale of illicit non-duty-paid cigarettes and achieve a significant growth in revenues.

The FBR revealed that after introducing the third tier, net payment of sales tax and federal excise duty by the legitimate cigarette industry went up 11% from Rs20,404 million to Rs22,623 million for July-November 2017.

The Senate Standing Committee on National Health Services, Regulations and Coordination, in a meeting held on December 5, 2017, took strong exception to the decrease in cigarette prices and told the FBR to reconsider its policy.

While noting that the FBR had undertaken a three-year audit of tobacco companies to determine whether anyone was involved in tax evasion, the committee recommended that the bureau should introduce a tracking system to stop tax dodging, if any, by the tobacco companies.

With the increase in government revenue receipts, cigarette production, according to statistics of the State Bank of Pakistan, swelled 71% from 11.48 billion sticks to 19.66 billion sticks in July-October 2017. “Even if we consider that cigarette production growth has fully captured the illicit, non-duty-paid cigarette market and illicit trade in tobacco products has been fully eliminated, still there is about 49% growth in local cigarette production,” the health ministry said in the letter.

“This growth … will definitely increase cigarette consumption as these cigarettes will be sold locally. Resultantly, tobacco-related deaths will increase in addition to increase in tobacco-related health care costs.” The ministry called for reconsidering the policy of reducing cigarette prices in order to save lives in the country. Moreover, to curb illicit trade in tobacco products, the tracking system should be implemented on a priority basis.

Published in The Express Tribune, April 8^th, 2018.

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