PIDE study casts doubt on FBR’s tobacco taxation regime

ISLAMABAD: Federal Board of Revenue (FBR) does not have any research-based data for ascertaining share of illicit tobacco trade so a taxation policy, formulated in this regard, stands failed to address revenues generation as well as health-related issues up to the desired mark, The News learnt on Friday.

It came up during a conference where Pakistan Institute of Development Economics (PIDE) drew the curtain on a research study titled “Economics of Tobacco Taxation and Consumption in Pakistan” conducted by the former in collaboration with global partners.

Presenting the findings of the study, Dr Khalid Mehmood, a PIDE economist, said the price increase discouraged consumption as price of a premium packet of tobacco [cigarettes] stood at $5, while in India it was over $3 and in Pakistan $1.21 a packet.

Pointing out political economy attached to tobacco industry, Mehmood said the research report suggested that capacity constraints of the FBR’s tax administration and requirement of use of technology for monitoring purposes needed to be done.

Economists, in the PIDE study, have recommended a two-tiered taxation structure with increased tax rates instead of existing three-tier system.

Moreover, the political economy analysis of tobacco taxation and administration revealed that tobacco taxation suffers from the overall institutional and governance problems ingrained in Pakistan’s taxation system, and these cannot be fully resolved without serious reforms in the tax structure and administration in the country.

The report advocated that ideally a single-tier tax structure should be in place, which would lower the administrative effort required for implementation, give fewer incentives to tobacco companies for tweaking prices, and increase the tax rate overall, but it entails a high probability of enhancing the illicit trade, thus affecting both health and revenue outcomes.

Zaheer Qureshi, Secretary Federal Excise Duty FBR, said the revenue authority did not have any research-based data of illicit tobacco trade share as the anti-tobacco campaigners found that its share was not more than 9 percent but the industry claimed it stood at in the range of 34 to 40 percent.

Qureshi said he would love to know that the minister of health would one day convince the finance minister with the help of empirical evidence to take a decision on the taxation of tobacco with the purpose of discouraging the use of tobacco.

He said when the illicit tobacco was made available in the markets then the FBR would have a softer corner for those who are contributing close to Rs100 billion to the national kitty.

The official said the FBR failed to ensure effective enforcement but it was a dilemma for the policymakers that when they increased taxation for formal sector the consumers shifted towards cheaper illegal manufacturers of same brands. He also highlighted the FBR was facing lack of jurisdictional powers in AJK and FATA, so illicit traders shifted business to these areas.

Roberto Iglesias, a World Health Organization (WHO) economist, said there was need to carefully listen to the tax authorities to help them devise such strategies where collection increased and health objectives were achieved simultaneously.

Iglesias said the industry used tactics of “SCARE” by presenting excuses such as with S they termed excuse of smuggling and illicit trade, C for commercial and legal channels, A for anti- poor rhetoric, R for reduction in revenues and E for negative employment impact.

These excuses, he said, the tobacco industry used to make its findings credible. “There is need to solve problem of tax evasion but be reminded that there is co-relation with price increase and discouragement into usage of tobacco,” he said.

The panel of PIDE economists that worked on the study comprised Durre Nayab, Muhammad Nasir, Junaid Alam Memon, Muhammad Khalid, and Anwar Hussain.