The fight against sale and consumption of tobacco products is picking up pace across the globe with the primary objective of protecting people from deadly diseases such as tuberculosis and cancer. Pakistan is no exception as it has also taken several steps in this regard. For example, cigarette manufacturing companies here cannot advertise their products in mass media or sponsor any festivals or sports events, there is a compulsory pictorial warning on cigarette packs, display of posters and billboards at points of sale is disallowed, sale of tobacco products to children under 18 is a punishable act, all public spaces are smoking-free and so on.
But all these efforts seem to go down the drain when one goes through the State Bank of Pakistan (SBP) report on the country’s state of economy during the first quarter of the fiscal year 2017-2018. The report states the production of cigarettes has increased by 92 per cent in this quarter as compared to the production during the corresponding period of the previous year. On the other hand, the increase in revenue from the sale of cigarettes during the same quarter is hardly around 10 per cent. This is far below the projected figures of the Federal Board of Revenue (FBR).
This finding has disturbed the individuals and groups involved in fight against tobacco consumption, in different capacities. They were among those who had opposed the government decision to decrease taxes on tobacco products in this year’s budget as this would lower their prices and increase their demand. This is exactly what has happened. So, one can infer that either the number of smokers has increased or the consumption of the existing ones has almost doubled or there is a combination of both.
A look at the tax structure related to sale of tobacco products will make things clear. Earlier, there would be two tiers of taxation. The upper tier tax was applied on tobacco products with a price tag above Rs 72 and the lower tier tax on those that cost less than Rs 72. The tax applied on products in the upper tier was Rs 63.10 and that on those in the lower tier was Rs 28.40. The Ministry of National Health Services (MNHS) had recommended that the tax on the lower tier should be increased to Rs 44 as tobacco products in this tier were consumed by almost 80 per cent of the consumers. But despite this suggestion, the government introduced a third tier of taxation under which the tobacco costing less than Rs 50 would draw tax at the rate of Rs 16. It is alleged that cigarette companies have brought the prices of their brands down just to benefit from this concession and boost their sales.
The international community has also objected to this because Pakistan has ratified the World Health Organisation (WHO) Framework Convention on Tobacco Control (FCTC) and decided in principle to adopt different measures to discourage smoking.
Article 6 of the FCTC talks about the price and tax measures that can be taken to reduce the demand for tobacco. It points out the parties to the convention recognise that price and tax measures are an effective and important means of reducing tobacco consumption by various segments of the population, particularly in young persons. The FCTC suggests increase in duties and taxes so that the tobacco products become expensive, resulting in fall in their sale volumes.
Reportedly, a team from the MNHS has given a presentation to the concerned Senate Standing Committee and recommended removal of the third-tier and increase in the rate of taxation even on the two higher slabs. The committee in turn has asked the FBR to remove the third-tier on the pretext that this step has given a boost to cigarette production and sales but failed to increase revenues considerably. The crux of the discussion was that the tobacco industry had secured benefits for itself by taking plea that lowering of taxes will help check smuggling and evasion of taxes by some local manufacturers. It was also submitted that the sale of cigarettes had increased by 71 per cent in four months and the revenue has increased by only 11 per cent.
When contacted, a spokesman for the MNHS confirms that the ministry is coordinating with relevant ministries to get the tax increased on cigarettes and other tobacco products in accordance with the obligations under the FCTC. While the FBR contests the recommendations under the convention are not binding on it and it has sovereign right to frame its tax policies, the opposing view is that these become binding once a country becomes party to the convention.
Sajjad Khan, former manager of a local cigarette company that has closed down, challenges the argument by the FBR that local manufacturers do not pay taxes and that is why they need to be tackled by bringing down taxes applicable on tobacco products of multinationals. “If there is evasion of taxes, then who is responsible?” He says the FBR appoints people in local factories to monitor production and payment of taxes. “It must make them accountable instead of creating problems for the local industry and its human resource.”
Khan alleges that the multinational companies have created an absolute monopoly for themselves and are dictating prices of tobacco in the absence of local competitors. The tobacco dealers, he says, are suffering heavily due to this. In case they do not agree to sell at low rates, they are subjected to 5 per cent tax on the value of the stock they are holding.
Nadeem Iqbal, Executive Director, Network for Consumer Protection — an NGO based in Islamabad — says ‘illicit cigarettes’ is a term wrongly used in this context. Cigarettes, he says, can be smuggled or non-duty paid and their availability in the market results in revenue loss to the exchequer. Besides, it hits the sales of the companies paying the applicable taxes on their products.
Iqbal says the companies namely the Pakistan Tobacco Company (PTC) and Philip Morris prepared their case on this ground and approached the FBR and the government to seek relief. The third-tier was introduced through a finance bill which, he says, is an Act of the Parliament and shall be removed through a similar process. He says they are convinced that the third tier must go but what’s important is that the right forum shall be approached for this purpose.
The matter of lower taxes on tobacco products has also been taken up by the Peshawar High Court (PHC) which was approached by Hameed Khan, a tobacco dealer in Swabi. The court sought and received a reply from the FBR and will be hearing the parties to the case on the next hearing day.
Babar Yousafzai, the counsel of the petitioner, tells TNS that they have taken a plea that this discriminatory decision has only benefitted the multinationals. These companies, he says, have grossed huge revenues at the cost of tobacco growers and dealers, local cigarette manufacturers and their employees and people’s health. He shares the whole supply chain is under the control of these companies that are pressurising the farmers as well as tobacco dealers.
He adds that the failure of the FBR to earn even a fraction of the projected revenues proves that the decision to introduce third-tier has backfired. “What has increased is the number of smokers added to the already existing pool.” He says it is just like selling Mercedes at the rate of Mehran in a market. Everybody will opt for the former resulting in a stop in the production of the latter. When the competitors disappear from the market and come under debt the prices can be increased again, he adds.
In words of Dr Muhammad Iqbal, Spokesman for FBR, the decision to introduce third tier of tax was taken because revenue collection was decreasing due to the sale of counterfeit cigarettes in the market. As customers were compelled to buy counterfeit cigarettes that cost less and were non-duty paid, the board thought it would be a way to help companies paying all applicable capture this segment also.
Yousafzai contests this plea taken by the FBR and says illicit trade, counterfeiting and tax evasion must be controlled through regulatory measures and not through lowering of taxes on tobacco products.