Cigarette taxes cause more revenue loss than gain

Study highlights revenue losses due to current tax policies in Pakistan's cigarette industry

A study by the Lahore University of Management Sciences (LUMS) has highlighted the detrimental impact of current tax policies, particularly the federal excise duty (FED) adjustments, on Pakistan’s cigarette industry, causing more revenue loss than revenue gain.

The study “Impact of Taxation on the Cigarette Sector in Pakistan,” led by LUMS Associate Professor of Economics Kashif Zaheer Malik, calls for immediate government attention to address the issue. It reveals that frequent and substantial increases in FED have profoundly affected the cigarette industry, underscoring the need for a balanced and effective tax policy to combat tax evasion and create a level playing field for all manufacturers.

The report emphasizes the importance of comprehensive enforcement, broader tax base expansion, and public awareness to mitigate the adverse effects of illicit trade on Pakistan’s economy. It details significant revenue losses due to a shift from legitimate to illicit cigarette consumption following tax hikes.

A primary survey conducted as part of the study found that approximately 42% of cigarette sales were of duty-paid brands, while 58% comprised illicit brands, including locally manufactured tax-evaded and smuggled products. This indicates potential tax evasion amounting to Rs300 billion, presenting a substantial challenge to tax enforcement.

The study notes that legitimate companies have borne the brunt of increased excise duty rates over the past two years, resulting in a decline in their volumes. In contrast, illicit cigarettes continue to thrive in the market due to lower prices and lax enforcement measures.

“The government has implemented various initiatives to bring more companies and the illicit sector under the tax net, but these efforts have not successfully reduced illicit trade,” Malik said.

According to the LUMS report, the success of initiatives like the track and trace system depends on a comprehensive rollout across all industries and a unified, consistent enforcement campaign. Malik suggests that a comprehensive approach, combined with the government’s focus on expanding the tax base, could potentially reduce the prevalence of illicit trade and tax evasion.

The report concludes that given the high price sensitivity in the Pakistani market and the widespread availability of illicit brands, existing excise duty tiers must be reconsidered and re-evaluated to recover lost tax revenue. It recommends a balanced approach to taxation to address the challenges of tax evasion and support the legitimate cigarette industry.

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