Mohammad Bilal is actively participating in relief work in Lyari, an underprivileged neighborhood of Pakistan’s biggest metropolis Karachi, during the ongoing crisis amid the Covid-19 pandemic and subsequent lockdown, which has affected millions in the country. As many worries about the people living below the poverty-line, which was predicted to jump to 40% by June this year even before the pandemic, but Bilal says it’s the people with collar jobs that have been affected the most by the lockdown.

“It is an unusual situation for the poor too but they know how to survive with little or no earning. These unusual times are unprecedented for many persons of the middle income group, who don’t know how to make ends meet after losing work. They have never asked before and they don’t even know how to look for charity,” he said. Pakistan is struggling for many reasons during the Covid-19 pandemic. Like many other countries, Pakistan has started to feel the heat for its lack of healthcare facilities. One other thing that is hurting the country more as Covid-19 cases are far from its peak, is rampant hunger due to the extended lockdown.

Dr. Hafiz A Pasha, the country’s renowned economist, had predicted in a recent article in the Business Recorder that the percentage of the population below the poverty line, which was 31.3% in June 2018, would sharply jump to over 40% by June 2020. In absolute terms, people living in poverty will increase from 69 million in June 2018 to 87 million by June 2020, indicating a 26% increase in poverty or an addition of 18 million people. The worst part is that Dr Pasha predicted this figure before Covid-19 pandemic and lockdown in the country.

In the backdrop of all this and already a struggling economy, Prime Minister Imran Khan has announced to distribute Rs12000 among 120 million households – with an estimated cost of Rs144 billion. It was never more important to look for increasing government revenues by bringing the economy into the tax net.

One such industry can be the tobacco industry that needs to be brought under proper documentation, which means to curtail trade of illicit cigarettes by either bringing the illicit trade of cigarettes under tax net or completely ban it. Almost all industries need to be properly evaluated for proper taxation but properly taxing the industry and documenting the illicit trade of cigarettes will bring about two benefits to Pakistan in the backdrop of Covid-19 pandemic. The first is simply the revenues could be ramp up by Rs50 billion approximately as according to some studies, Pakistan loses tax revenues from the illicit trade of cigarettes of up to Rs50 billion every year.

Due to illicit trade of cigarettes in the country, the price elasticity of cigarettes, which means the change in price doesn’t affect demand, doesn’t work. If the price is increased the demand for cigarettes doesn’t come down because people switch to low-quality tax evading cigarettes. Smoking is injurious for health and since the corona virus attacks lungs, it has been argued that smokers are more prone to contract Covid-19.

It has been largely understood that increasing the tax on the tobacco industry will discourage smoking but the inelastic demand due to the presence of illicit cigarettes does not let that happen. A higher taxation rate on cigarette manufacturers has so far led to smokers to switch to a lower priced product and poorer quality product, which will be even worse for health. A large number of unregistered cigarette producers are not paying any taxes and selling their product between Rs25-35 rupees, which is lower than the minimum rates set by the government of Rs63/packet.

So what needs to be done is to bring in the undocumented and illicit tobacco trade under the tax net. According to a recent survey by Oxford Economics, Pakistan loses around Rs 44 billion every year due to illicit tobacco trade in the country. So at a time when revenues are falling and will continue to fall, because of Covid-19’s impact on the economy and on revenue collection, it makes sense for the government and the Federal Board of Revenue to take serious measures to tap unexplored avenues. And one of them would be to bring in this industry’s illegal and illicit segment under the tax net.

The past has shown that simply raising taxes hasn’t worked because the illicit cigarette manufacturers don’t little or no tax. Their prices don’t change and hence their product becomes even more attractive since those in the documented tax-paying sectors have to factor in the increase in tax in pricing their product. The result is that total consumption of cigarettes doesn’t fall but switches to the illicit product, which in itself can be cause for greater public health concern.

Furthermore, by pursuing this approach, the government will raise revenue collection, which as per a recent statement by Planning Minister Asad Umar, could fall by as much as 35% below this fiscal year’s set target.

In a press meet held recently by Philip Morris Pakistan Managing Director Roman Yazbeck, he shared details of the industry. He said that the share of non-tax-paid cigarettes has increased up to 50% from 33% due to increase in excise duty and taxes over the past two consecutive years i.e. 53% and 23%, respectively. He also pointed out that despite the increase in tax, consumption of cigarettes hadn’t increased but had switched to the illicit sector, and this was reflected in that sector’s increase market share.

If by bringing the 40% market of the illicit tobacco industry under tax-net can bring Rs44 billion in revenues to government, the government could fund more than 30% of the relief and aid it seeks to provide to Pakistan’s needy and poor under the Ehsaasprogramme, which has an approximate cost of Rs144billion. Moreover, youngsters could be discouraged from at least low-income areas from beginning to smoke by curtailing availability of low-quality cheap cigarettes.

The author is a business journalist, formerly associated with Express Tribune and Profit Magazine, with a keen interest in sports. He is working on his M.Phil thesis (Economics) at Karachi University.