The imposition of high taxes on cigarettes inadvertently promotes the rise of illicit cigarette trade in Pakistan, sparking concerns about the government’s strategy to protect public health through increased taxation.
Experts are urging policymakers to prioritize curbing the illegal sale of cigarettes and strengthening enforcement measures to safeguard public health and prevent substantial economic losses resulting from illicit trade, which costs the country billions of rupees annually.
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Despite implementing higher taxes on cigarettes, smoking rates in Pakistan continue to escalate, casting doubt on the government’s approach of using taxes as a deterrent to protect public health. It is perplexing how individuals manage to afford cigarettes amidst significant inflation rates, suggesting a failure of the government’s tax-based approach to making tobacco less accessible.
Annual cigarette sales in Pakistan have consistently remained at 80 billion sticks for several years, underscoring the ineffectiveness of the government’s tax policies aimed at making cigarettes less affordable. Syed Saifullah Kazmi, Head of Investment Banking at Intermarket Securities Limited, highlights that while inflation reduces purchasing power, the cost of legally-taxed cigarettes continues to rise, making them even more unaffordable. This scenario drives consumers towards cheap illicit cigarettes, fueling their demand.
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Illicit cigarettes currently account for 40% of the cigarette market in Pakistan, and this market share may surge to 50% due to the tax hike. Non-duty-paid cigarettes are readily accessible and sold at half the legal price. Inflation and weakened purchasing power contribute to the appeal of these inexpensive illegal cigarettes.
Dr. Arthur Laffer, an American economist, emphasizes the necessity of strengthening law enforcement capabilities to combat the illicit tobacco trade in Pakistan. He argues that relying solely on tax increases encourages tax evasion, leading to economic losses in the tobacco sector.
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Kazmi urges the Government of Pakistan to avoid raising cigarette taxes unless the volume of illicit trade is significantly reduced and the resulting revenue loss is mitigated. He asserts that improving enforcement capabilities within the country is crucial to curb illicit tobacco trade effectively.
