One of the main disagreements in every budget preparation is what to do about cigarette taxes. Proponents of tougher tobacco control generally say that ideally every country should check the price of cigarettes in order to reduce the number of smokers by significantly increasing taxes. Multinational tobacco companies intervene by saying that rising prices inevitably lead more smokers to buy illegal cigarettes, a problem that has plagued the country for many years. The same arguments are made every year, backed up by weighty reports, making a dead end almost guaranteed.
This was the case in the 2020 budget, and duties on cigarettes remained unchanged. RBF data suggests that federal tobacco excise revenue is expected to increase by around Rs. 10 billion (+ 10%), making it an inspired move. But the spoils are widely shared with the industry. Pakistan Tobacco Company (95% owned by multinational British American Tobacco) increased 2020 profits by 27% to Rs. 16.4 billion and Philip Morris Pakistan (97% owned by global market leader Philip Morris International) recorded a loss of nearly Rs. 2 billion in a profit of almost Rs. 2 billion It must also be recognized that higher revenues, by FBR and the industry, can be largely attributed to the decision to close the borders for keep Covid-19 at bay. This has dramatically reduced the influx of illegal cigarettes from overseas, helping both producers and the tax authorities.
As borders reopen, so do the floodgates against illegal cigarettes, putting further pressure on the industry’s revenues and profits. This is to be announced in the next budget. Multinational cigarette companies would point to 2020 and argue that if taxes remain unchanged or even reduced again, revenues will rise again as well. They would say it fixes the disproportionate tax increases of 2019 and helps them better compete with cheaper illegal brands and increase the size of the legal and tax-paid market.
In fact, multinationals already control the Pakistani cigarette market from top to bottom, with 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 binding minimum price of Rs 62.76 means there is nowhere to go for small national brands that are being pushed out of the regulated and opaque gray market, only to be vilified by the same multinationals that chased them there. -low.
There is nothing positive to be found in this scenario, and it is a scenario that the government not only has the power but also the responsibility to change.
To reverse the situation and at the same time widen the country’s tax net, FBR must give domestic companies a realistic chance to compete with wealthy multinationals. It can do this by differentiating federal excise duty rates between multinationals and domestic companies, while keeping the minimum levels currently in place to ensure that tax rates only increase upward. This approach creates the basic conditions for a sector in which the tax burden can be borne fairly by all participants. It will restore the competitive equilibrium in the sector, solidify the revenue base, reduce illegality and make health campaigns more effective. inp