The syntax of sin tax

The PTI government’s decision in December 2018 to impose a sin tax to enhance budgetary allocations for health has come as a pleasant surprise. If this plan is brought into effect, it will serve as a major step towards tuning up the country’s financial system to the global development agenda.

The Ministry of National Health Services, Regulations and Coordination (NHSRC) plans to impose this tax on tobacco and sugary drinks to generate funds to increase the health budget. The sin tax is not a standalone measure. It is part of a global development agenda. As per the National Health Vision 2016-2025, “federal and provincial governments will develop joint strategies to enhance resource mobilisation for health from official development assistance/international development partners, private-sector engagement, and taxes, such as [the] sin tax”.

A sin tax has two components. First, it seeks to reduce the consumption hazardous products that cause noncommunicable diseases. Second, once the tax has been collected, the government dedicates financial resources to fund health campaigns. To date, the government has restricted itself to the first stage. Now, it aims to bring about a major policy shift, which is quite complex.

This complication was revealed during the last budget debate when the proposal for a 10 percent levy on tobacco products to generate funds for healthcare witnessed a stillbirth in parliament. The central debate focused on the legal implications of this measure – as it isn’t a fiscal measure – and whether a special law needs to be passed by parliament to further this major policy measure.

If the sin tax is imposed, it will align Pakistan with the growing international movements that dedicate funds received through taxes for development under international instruments like the WHO Framework Convention on Tobacco Control (FCTC), the Global Action Plan for the Prevention and Control of Noncommunicable Diseases (NCDs), and the Addis Ababa Action Agenda.

NCDs – mainly cardiovascular diseases, cancer, chronic respiratory diseases and diabetes – are the main causes of death across the world. More than 36 million people die annually from NCDs (that’s 63 percent of global deaths), including more than 14 million people who die too young between the ages of 30 and 70. Low- and middle-income countries already bear 86 percent of the burden of these premature deaths, resulting in cumulative economic losses of $7 trillion over the next 15 years and widespread poverty.

In Pakistan, the NHSRC recognises that the common underlying factors for non-communicable diseases, including our lifestyle and nutrition, have not been addressed adequately. The country is ranked seventh-highest in the diabetes prevalence list. One-in-four adults over 18 years of age is hypertensive and smoking levels are high (38 percent among men and seven percent among women). Rising but still underestimated rates of cancer and cardiopulmonary disease remain largely ignored. The higher intake of fats, salt, sugar and smoking are the major factors that contribute to NCDs.

The centuries-old sin tax is usually imposed on liquor and on tobacco in Western societies. Critics believe that it is legitimising sin. In Pakistan, under religious sanctions liquor and opium are criminalised and banned. Tobacco is taxed. There are multiple taxes on tobacco, such as the federal excise duty (FED), which the government of Pakistan claims has been levied to reduce tobacco consumption. Although there is no policy document to highlight this, this approach is mentioned in the budget speeches of successive finance ministers.

In Pakistan, the rationale for FEDs is in sync with WHO recommendations: “effective tobacco taxes contribute significantly to state budgets. Increasing tobacco taxes generally further increases government revenues, as the increase in tax normally outweighs the decline in consumption of tobacco products”.

If the consumption tax in Pakistan did create a reduction in cigarette consumption, it has yet to be recorded. This tax needs to be linked to research evidence gather through the Global Adult Tobacco Survey (Gats), the Global Youth Tobacco Survey (GYTS), the Pakistan Demographic and Health Survey (PDHS) and the Household Integrated Economic Survey.

Official statistics reveal that more than 98 percent of FED collections are obtained from six major items in addition to cigarettes. Cigarettes constitute 33 percent of these collections. Around 26.2 percent of collections come through cement, 21.8 percent from services, 11 percent through beverages, 5.2 percent from natural gas, and 1.8 percent from edible oil.

FEDs constitute 8.9 percent of indirect taxes and 5.5 percent of the federal taxes collected by the FBR. Collections from federal excise duties registered a growth of just four percent during 2017-18 as compared with collections made during the previous year. The net federal excise duties collected in 2017-18 stood at Rs205.9 billion as compared with Rs197.9 billion collected during the previous year. Collection from cigarettes amounted to Rs67.139 billion.

As per estimates, the performance of cigarettes, services, beverages, and natural gas hasn’t been satisfactory. The tobacco tax has its own complications. The government is still struggling to ensure that every pack of cigarettes that is produced and consumed in Pakistan is taxed.

Taxes on the cigarette industry are divided into two categories: duty-paid and duty-non-paid (DNP). Taxpaying companies allege that higher taxes benefit the DNP because counterfeit cigarettes are sold at a much lower price. Transnational companies claim that DNPs captured 40.8 percent of their market in 2017. These transnational companies won their argument with the FBR, which created a third tier in the existing tax structure within the 2017-18 budget, reducing tax rates to make cigarettes prices compatible with DNPs.

Concerns over DNPs and the third tier have been made by advocates of tobacco control. These reservations were also echoed in the Senate Committee in early 2018 as many believed that the third tier on cigarettes has made the item unattractive for the local industry and has brought benefits for multinational companies.

Tobacco-control groups are of the view that counterfeit businesses should be curtailed through strict laws. But the FBR, citing its limited financial and human resources, controls such businesses through policy measures. Now the government has signed the Protocol to Eliminate Illicit Trade in Tobacco Products, which aims to secure the supply chain of tobacco products through licensing, due diligence and record-keeping. It requires a global tracking system that will allow governments to follow-up on tobacco products from the point of production to the first point of sale.

The WHO recommends countries to consider dedicating revenue to tobacco-control programmes, such as those that promote health and disease prevention, and finance appropriate structures for tobacco control. This movement has itself gained momentum from the Addis Ababa Action Agenda, which identifies tobacco taxation as a mechanism to increase resources to fund the implementation of the new sustainable development goals. This marks a significant international development.

According to the latest report by the WHO, 25 countries have used revenue from tobacco taxes to fund health programmes. But only 10 countries – Chile, Cook Islands, Costa Rica, Iceland, El Salvador, Honduras, Iran, Panama, Poland, and Vietnam – have directed resources towards tobacco control. Other countries also utilise resources derived from tobacco taxation to promote health and prevent noncommunicable diseases.

Euromonitor, a market research entity, reports that with the growing prevalence of obesity and diet-related diseases, public awareness of unhealthy food and drinks follows suit. Public health bodies are desperate to find solutions and sin taxes are among the possible remedies.

Out of 19 countries that have enforced sin taxes on food or drinks, around 13 did so during the last decade. However, an increasing number of countries are committed to introducing sin taxes in the next year or two. Along with the recent WHO recommendations on sugar taxes, all planned food/drink sin taxes will target sugary soft drinks to reduce sugar consumption by up to 20 percent.

The writer is a freelancecontributor.

Email: nadympak@hotmail.com