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Excise duty on cigarettes to promote illicit trade KARACHI: The proposed rise in the federal excise duty on cigarettes for fetching additional Rs10 billion revenue may not be realistic, keeping in view the expected increase in illicit tobacco market because of growing gap between duty-paid and duty-evaded cigarettes, industry people said. Upon taking a closer look it becomes evident that tax incidents on cigarettes in Pakistan are one of the highest compared to other developing countries and much higher than countries with high illicit trade. An optimal duty structure has proven to be a key success for reducing illicit trade and enhancing government revenue as high taxes provide more leeway for evasion, especially where enforcement apparatus is less than effective. According to the World Health Organisation, the global average of total tax burden (excise plus other taxes) on cigarettes is 59.4 percent. In Pakistan, the minimum tax levied on cigarettes is 68.5 percent, and it goes up to 81 percent for top brands. Thus, it is obvious that in Pakistan taxes on cigarettes are already high. "Any drastic tax changes will not meet the desired objectives. It has been proven again and again that increasing taxes, especially when tax evasion is very high, do not decrease smoking. It only results in change of composition of supplies from expensive duty-paid manufactures to cheep duty-evaded products. In short, smoking rates continue to stay content, while share of illicit products increases as consumers switch to cheaper duty-evaded alternatives like Pine, Esse, etc," an executive of a tobacco company said. Tax changes also do not necessarily mean increase in tax revenue, for the government. In 2009 and 2010, taxes on one category of cigarettes were increased from 57.5 percent to 68.5 percent. In 2010, the revenue from cigarettes industry in Pakistan actually stopped growing. This was result of increasing sales of cheaper tax-evaded products. "Government should consider long-term strategy to tackle illicit trade before embarking on a project, which will neither decrease smoking nor increase government revenue," an official said. He informed that the donors were exerting extensive pressure on the government to increase tax collection. "The FBR seems to resorting to squeezing the existing tax payers, which will only be a short-term solution. It will eventually be backfired, leading to more tax evasion and revenue loss. There is a need of immediately re-considering these proposed measures to avoid any adverse impact on tax collection. The government should instead consider a throughout strategy to widen tax net and increase tax base rather than putting more burden on existing taxpayers," the official said. On the other hand, tobacco farmers will also suffer greatly if the proposed increase in the federal excise duty is executed. Cigarette industry buys nearly 70-80 million kilograms of green crops from tobacco farmers every year, generating income of Rs12 to 13 billon for these farmers.
