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Revenue vs public health

Debate over retention or removal of tax relief for tobacco industry gets louder as budget nears

Revenue vs public health

The annual budget is expected to be announced on June 11. The anti-tobacco campaigners and the representatives of the formal tobacco sector have intensified their efforts to get the tax structure on the sector devised according to their desires.

The anti-tobacco lobby wants removal of the tax relief awarded to the tobacco sector on grounds that the lesser tax on cigarettes has resulted in increased sales and fall of revenue earned by the government. On the other hand, the tobacco sector wants the tax relief to stay. The rationale it gives is that if the taxes on their products are increased they get expensive so people turn to low-cost products available in illicit cigarette market. This on one hand hurts the legitimate tobacco industry and on the other deprives the government of revenue.

This debate was always there but in the recent past it intensified when the government of Pakistan imposed the mechanism of third slab on cigarettes. Under this slab or tier, tax on cigarette packs within a certain price ranges was reduced drastically. Earlier, there were only two slabs that proposed higher taxes for comparatively high priced cigarettes.

The reason cited for this tax rate revision is that the legitimate sector shall be allowed to bring down its prices to compete with the illicit products and regain its lost market share. However, there is an allegation against the big multinational cigarette companies, especially the Pakistan Tobacco Company (PTC) — a subsidiary of British American Tobacco (BAT) — and Philip Morris, that they have used the pretext of illicit trade hurting them just to make their products more affordable for people. When there is less tax, the retail price comes down and the demand for the product rises.

The question here is that the arguments of which party shall be given more weightage during the preparation of this year’s annual budget. Besides, is it justified on part of the tax authorities to give tax relief to cigarette companies just for the reason they have failed to curb illicit trade? And does the legitimate cigarette companies’ demand for a level playing field hold ground. TNS talks to stakeholders to get an idea of the situation.

Malik Imran, Country Representative of Tobacco Free Kids (TFK) — an international organisation working on tobacco control — challenges the logic that the tobacco sector shall be awarded tax relief to combat illicit trade. He says these two multinational cigarette companies are citing concocting figures just to avoid high taxes they must pay under the international commitments Pakistan has made.

He explains that under the clauses of the World Health Organisation’s (WHO) Framework Convention on Tobacco Control (FCTC), the Parties (signatory countries) are required to increase taxes on tobacco products regularly over time with an aim to make these expensive and curb their sales. The concerned section of the convention suggests that the signatories shall take measures like: “Implementing tax policies and, where appropriate, price policies, on tobacco products so as to contribute to the health objectives aimed at reducing tobacco consumption.”

Imran says several studies carried out by different non-profit organisations have shown that the share of illicit trade in cigarettes is far less than that claimed by the industry. Citing the findings of Pakistan National Hearts Association (Panah) in collaboration with the Human Development Foundation (HDF), he says this share is around 9 per cent and not 40 per cent claimed by the tobacco industry. Therefore, he requests the government to remove the third tier and increase taxes on cigarette products.

An official of PTC comes up with a different version. He tells TNS that share of illicit trade in the country had reached 41 per cent when the third tier was introduced by the government to save it from collapse. At the same time, he says, it was an opportunity for the cigarette manufacturers involved in illicit trade to increase their product prices slightly and get regularised but they reduced their prices further.

He adds that laws have come up every now and then but the level of enforcement is poor. One can go to a cigarette shop and easily buy smuggled cigarettes. These are available in packs that do not carry pictorial warnings. Similarly, he says, many local brands are selling cigarettes for as low as Rs25 to 40 per 20 cigarette pack despite the fact that the minimum price set by the government is Rs47.39 per pack and the minim tax payable per pack is Rs33.

The official claims whenever their prices rise, consumers shift to local brands that are far cheaper because many of them are counterfeit or they do not pay tax. The official says though 13 organisations including customs, police, rangers, army, intellectual property organisation and coast guard are responsible to combat illicit trade, this menace has survived. Even at the moment, he says, that the volume of total cigarette market in Pakistan is around 80 billion sticks, out of which the share of legal cigarette market is 67 percent and illegal cigarette industry’s market share is around 33 percent.

However, there is a perception that despite the introduction of the third tier the revenue has not increased as per claims of the tobacco industry. A senate committee formed under Senator Kalsoom Parveen has investigated causes of decline in tax collection in the tobacco sector and suggested removal of the third tier.

The PTC official reiterates that the illicit sector and the violations of the existing tobacco laws are harming their business. “While we ensure 100 percent compliance these players don’t give any heed to these laws.” He says it is very common on part of these companies to give free goods to retailers, give cash rebates, offer free samples, announce prizes like umra package and sacrificial goats and advertise tobacco products which is strictly against the anti-tobacco laws. He adds they have no issue with rise in cigarette prices provided the illicit trade is curbed properly. In Sri Lanka, a cigarette pack is available for Rs400 to Rs500 but the companies have no issue because there is negligible illicit trade. He also claims the revenue collection from the two multinational companies will be around Rs115 billion this year.

Hafiz Shahid Ghani, a lawyer based in Lahore with interest in anti-tobacco legislation, points out that companies like PTC that level allegations of foul play against local players themselves violate local laws. He shares that a notice was issued last week to PTC by Dr Zia ul Islam, Technical Head, Tobacco Control Cell (TCC), for violating certain rules.

The letter states: “It has been noticed through sections of media that Pakistan Tobacco Company Limited has advertised tobacco products at various hotels in Islamabad and Lodhran. Morever, free goods carrying promotional messages of cigarette brands have also been supplied to those hotels. Snapshots of tobacco products advertisements and free goods are attached here with.” The said official has also directed the company to stop/rollback all such promotional activities ensuring compliance with the related SROs.

Muhammad Javed, Project Manager, TCC, Ministry of Health, tells TNS that they are also in favour of the removal of the third tier and have made this recommendation to the government. “We are hopeful of positive outcome.” He says they are taking strict actions on violations of anti-tobacco laws/rules and are all set to introduce pictorial warning on 60 percent surface area of the cigarette packs. The photo used this time will be of a human foot suffering from gangrene, he concludes.

Shahzada Irfan Ahmed

shahzada irfan
The author is a staff reporter and can be reached at [email protected]

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