ISLAMABAD—A recent study by the Lahore University of Management Sciences (LUMS), ‘Impact of Taxation on the Cigarette Sector in Pakistan,’ has revealed a significant issue that requires urgent attention.
The study focuses on the impact of tax policies, particularly Federal Excise Duty (FED) adjustments, on Pakistan’s cigarette industry, causing the government to lose more revenue than it gains.
The study, led by Kashif Zaheer Malik, an experienced Associate Professor of Economics at LUMS, uncovers the profound effect of frequent and substantial increases in FED on the cigarette industry.
The report emphasizes the need for a balanced and effective tax policy that addresses tax evasion challenges and supports a level playing field for all manufacturers. It highlights the importance of comprehensive enforcement, broader tax base expansion, and public awareness to mitigate the detrimental effects of illicit trade on Pakistan’s economy.
The report also presents a detailed assessment of the revenue losses caused by the trend of shifts from legitimate to illicit cigarette consumption following tax increases. According to the report, a primary survey revealed that approximately 42% of sales are DP brands, while 58% comprise illicit brands, including locally manufactured tax-evaded and smuggled products. This translates to a potential tax evasion of PKR 300 billion, posing a substantial challenge to tax enforcement.
Furthermore, the research indicates that increased excise rates over the past two years have primarily affected legitimate companies, causing a decline in their volumes. Illicit cigarettes continue to sell in the market due to their lower prices and uninterrupted availability, facilitated by the government’s lax enforcement.
According to Malik, the government’s initiatives to address the extent of the illicit sector and bring more companies and the illicit sector under the tax net have not been successful. The report suggests that the success of the Track and Trace System relies on a genuine, comprehensive rollout across every industry, backed by a unified and consistent enforcement campaign. Malik added that this comprehensive approach, along with the government’s focus on expanding the tax base, could potentially reduce the prevalence of illicit trade and tax evasion, offering a brighter future for the industry.
In conclusion, the report recommends reevaluating and reconsidering the existing excise tiers based on the significant price sensitivity in the Pakistani market and the widespread availability of illicit brands. This approach often results in the substitution of higher-priced legitimate brands for lower-priced illicit brands, leading to potential lost tax revenues.