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Taxing tobacco

Consider the fact that every fourth cigarette sold in Pakistan is sold illicitly. It comes as no surprise then that the Federal Board of Revenue (FBR) recently ran an ad in all major daily papers asking people to ‘Say no to smuggled/non-duty paid cigarettes’. What was surprising about the advertisement, however, was that it did not feature any of the popularly smuggled brands responsible for illicit sales.

Brands that are popular both in Pakistan and abroad (Marlboro, Dunhill, Benson & Hedges) were nowhere on the ad. The ad conveniently skipped brands like Marlboro, Dunhill and Benson & Hedges, which are also produced locally. On the outset, FBR’s brand choice in the ad might not make sense.

Many of the brands actually featured are so obscure that their trade is negligible. How many people do we know who smoke Pine Slims or More on a regular basis? Have most people even heard of the brand called Pleasure?

But the ad makes sense when we think about how the tobacco industry operates. It follows a simple mechanism: addiction. For local producers of international brands, an ad like this works in their favour.

A smoker who is addicted to an international brand is ready to buy its local version when the smuggled one is not available. In this way, international brands that are smuggled end up creating markets for local versions, while the parent company makes money either way.

Losing billions While Big Tobacco remains a potent a force all over the world, it is particularly powerful in Pakistan where it dominates 81 per cent of the market. At the same time, tobacco is one of our most heavily taxed industries. Last year alone, almost Rs 130 billion were collected from the tobacco giants. An amount that high should make us reflect on the scope of influence these companies potentially wield.

Keep in mind the scale of the tobacco industry- the annual tax imposed on the industry can increase by 25 per cent if illicit sales are curtailed. For now, our national exchequer is losing at least Rs 30 billion annually because of the illicit cigarette business. The government, meanwhile, is trying to broaden its tax base from several avenues; moves like the recent announcement of a banking tax, and the campaign asking consumers to report on restaurants all clearly indicate the government’s
attempt to increase its tax collection.

This is not surprising – the International Monetary fund (IMF) recently asked ( the Pakistani government to impose additional taxes of Rs 160 billion to decrease its budget deficit for the coming year. The government is clearly stepping up its game, but in a country with a theoretically progressive but practically regressive tax system, we really need to see where this show is going.

If the FBR is serious about fixing the loss to the national exchequer, and if Pakistan is to actually tackle the problem of smuggled cigarettes, our government will have to take a firm and principled stand. It needs to introduce a policy against cigarette smuggling, one that is grounded in addressing the root of the problem, and is not partial to certain players. It needs to tackle the problem of smuggled cigarettes across the board. It cannot be manipulated by or cower to certain companies.

But the fact remains that Big Tobacco companies do not want to harm their markets (for smuggled brands), or lose their customers. So while they willingly condemn cigarette smuggling, they overlook brands their own companies produce locally. This is exactly what the FBR did. As long as there is obvious pandering to chosen brands, advertisements like theirs cannot be taken seriously by anyone involved in the trade. Meanwhile, the people of Pakistan will continue losing more and more tax money, and while cigarette smuggling effects the entire tobacco industry as a whole, it’s the homegrown brands and companies that really end up suffering.

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