Taxing non-essential items vital for economy

Islamabad : Pakistan has a ‘difficult-to-tax economy’ and limited revenue generation options but the International Monetary Fund (IMF) has declared taxing cigarettes and other non-essential items indispensable.

The IMF’s advice is based on its February report titled ‘Tax Policy Diagnostic and Reform Options,’ which highlights Pakistan’s tax system’s underperformance in revenue generation, efficiency, equity, fairness, and sustainability. The report underscores the need for structural reforms to tackle deep-seated issues in the tax regime.

Pakistan is all set to start negotiations for a long-term loan program with the global lender in upcoming days, health activists and experts have demanded the government to increase tax on cigarettes. “Taxing tobacco is the way forward. It is win-win for public health and for generation of revenue for the government,” said Malik Imran Ahmed, Country Head of Campaign for Tobacco Free Kids (CTFK).

Ahmed said that implementation of the IMF recommendations and jacking up the prices of cigarettes in Pakistan would push people to quit smoking and save hundreds of lives every year.

He said that despite the substantial taxes imposed on cigarettes, the revenue generated falls short of covering the healthcare costs incurred due to smoking-related illnesses. Tobacco taxation in Pakistan has always been under the influence of major industry players particularly the multinationals who would convince the government against raising taxes until recently.

However, a change has been witnessed in past few years and the taxes on cigarettes have been increased substantially. But Pakistan still is a place where cigarettes are cheaper from the region. The IMF report also mentioned that Pakistan has undertaken wide-ranging tax policy reforms in the context of an IMF-supported economic program. These included increasing excises for petroleum products and tobacco items.

According to details, excises cover a range of items, including fuel and tobacco but also cement and telecommunications services. Excise rates, particularly for tobacco and fuel products, were substantially increased, particularly in 2023.

“Similar to the DPL, FED rates on tobacco products were gradually increased between 2019 and 2022, and then saw a big increase by on average 146 percent in February 2023. Survey findings suggest that as a result of this increase, the consumption of cigarettes has declined by 20-25 percent,” the IMF noted.

As the authorities prepare for the IMF mission and for the next fiscal year’s budget, the Social Policy Development Centre (SPDC) has proposed 37% increase in Federal Excise Duty (FED) on tobacco products.

“Pakistan can save as many as 265,000 lives, generate an additional revenue of Rs37.7 billion and push 757,000 people to quit smoking through increasing the FED by 37 percent,” said the survey by SPDC.