One of the main disagreements in every budget preparation is what to do about cigarette taxes. Advocates of stronger tobacco control typically say that ideally, every country should check cigarette prices so that smoker numbers can be cut by drastically raising taxes. Multinational tobacco companies weigh in by saying that higher prices inevitably cause more smokers to buy illegal cigarettes, a problem that has plagued the country for many years. The same arguments are rolled out every year backed by weighty reports, making a stalemate outcome almost guaranteed.
Such was the case in the 2020 budget, and cigarette duties were left unchanged. FBR data suggests federal excise revenue from tobacco is set to grow by around Rs. 10 bn (+10%), making it look like an inspired decision. But the spoils are very much shared with the industry. Pakistan Tobacco Company (95% owned by the multinational British American Tobacco) increased its 2020 profits by 27% to Rs. 16.4 bn and Philip Morris Pakistan (owned 97% by global market leader Philip Morris International) turned a loss of almost Rs. 2 bn into a profit of almost Rs. 2 bn. It must be recognised also that higher earnings, by FBR and industry, can be largely attributed to the decision to close the borders to keep Covid-19 at bay. This greatly reduced the influx of illegal cigarettes from abroad, helping producers and the tax man alike.
As the borders gradually re-open, so do the floodgates to illegal cigarettes, putting pressure on revenue and industry profits once again. This has to be foreshadowed in the coming budget. Multinational cigarette companies would point to 2020 and argue that if taxes are kept unchanged again, or even reduced, revenues will rise again too. They would say that it corrects the disproportionate tax increases of 2019 and helps them to compete better with cheaper illegal brands and increase the size of the legal, tax-paid market.
In reality, multinationals already control the Pakistani cigarette market from top to bottom, their brands dominating the most expensive price classes as well as the cheapest. If a well-known multinational brand is sold at a similar price to a lesser-known local brand, a smoker is more inclined to choose the prestigious brand. A legally mandated minimum price of Rs 62.76 means there is nowhere to go for smaller, national brands which are pushed out of the regulated and into the opaque grey market, only to be vilified by the same multinationals that chased them there.
There is nothing positive to be found in this scenario, and it is one that government not only has the power but also the responsibility to change.
To reverse the situation and at the same time widen the tax net for the country, FBR must allow national companies a realistic chance to compete with the wealthy multinationals. It can do this by differentiating federal excise duty rates between multinationals and national companies, while guarding the minimum levels currently in force to ensure tax rates only move upwards. This approach creates the basic conditions for a sector in which the tax burden can be borne equitably by all participants. It will restore competitive balance in the sector, solidify the revenue base, reduce illegality and render health campaigns more effective. inp