A recent study of the Lahore University of Management Sciences (LUMS) has sought the government’s immediate attention to the impact of tax policies, particularly the federal excise duty (FED) adjustment, on Pakistan’s cigarette industry, which is causing more revenue loss than revenue collection.

The study titled “Impact of Taxation on the Cigarette Sector in Pakistan” has uncovered a pressing issue and invited swift attention.

The study, led by LUMS Associate Professor of Economics Kashif Zaheer Malik, revealed that frequent and substantial increases in FED have had a profound effect on the cigarette industry.

It highlighted the critical need for a balanced and effective tax policy that could address the challenges of tax evasion and provide a level playing field for all manufacturers.

The report underscored the importance of comprehensive enforcement, broader tax base expansion and public awareness to mitigate the detrimental effects of illicit trade on Pakistan’s economy.

It provided a detailed assessment of the revenue losses caused by the alarming shift from the legitimate to illicit cigarette consumption following tax hikes.

A primary survey was also conducted to ascertain the on-ground situation. It revealed that approximately 42% of sales were of duty-paid brands, while 58% comprised illicit brands, including the locally manufactured tax-evaded and smuggled products.

This translates into potential tax evasion of Rs300 billion, posing a substantial challenge to tax enforcement.

The research stated that the brunt of increased excise duty rates over the past two years had been borne solely by the legitimate companies, resulting in a decline in their volumes. Illicit cigarettes continue to be sold in the market due to lower prices and their uninterrupted availability due to lax enforcement measures by the government.

“The government has implemented various initiatives to bring more companies and the illicit sector under the tax net. These, however, have not been successful in reducing the illicit trade,” Malik said.

According to the LUMS report, the success of track and trace system, for instance, hinges on a genuine, all-encompassing rollout across every industry, coupled with a unified and consistent enforcement campaign.

Malik added that a comprehensive approach, along with the government’s focus on expanding the tax base, could potentially reduce the prevalence of illicit trade and tax evasion.

In conclusion, the report recommended that based on the profound price sensitivity prevalent in the Pakistani market as well as widespread availability of illicit brands, the existing excise duty tiers must be reconsidered and re-evaluated to recover the lost tax revenue.

Published in The Express Tribune, June 5th, 2024.

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