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Tobacco
industry in Pakistan
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Smoking may not be
good for health but it is certainly good for numerous national economies around the world,
and Pakistan is no exception. This article intends to highlight the important role tobacco
plays in the economics of the country, nothing more nothing less.
By Syed M. Aslam
Jul 31 - Aug 06, 2000
Tobacco industry — growing, manufacturing, distribution and
retailing — contributed 4.4 per cent or over Rs 27.5 billion to the total GDP of
Pakistan including Rs 15.17 billion, including Rs 14.54 billion in excise duty and sales
tax, in 1997. It is the single biggest contributor of excise duty, six-times than that
from cotton yarn. Over 5 per cent of all taxes collected in the country comes from the
tobacco industry. It employs over one million people directly or indirectly which in terms
of full-time equivalent jobs means 312,500 jobs supporting some 1.2 million persons.
The area under tobacco cultivation increased by 30 per cent during
1990-91 to 1998-99 — from 44,000 hectares to 57,000 hectares. The production has
increased even more significantly during the same period — by 145 per cent from
75,000 tonnes to 109,000 tonnes. The value-added sector, the cigarette production,
depicted a far more unproportionate increase of 72 per cent — from 29.8 billion
sticks to 51.5 billion sticks during the same period.
Tobacco is the only crop grown in Pakistan whose yield is well above
the world average and matches the per hectare yield in the US and other developed
countries — an average yield of 1,900 kilograms per hectare. Tobacco industry —
growing, manufacturing, distribution and retailing employs over one million persons
directly or otherwise. This translates in the full time equivalent of 312,500 jobs
supporting approximately 1.2 million persons. Manufacturing employs the highest number of
persons — 35 per cent followed by 33 per cent by growing and 32 per cent in
distribution and retail.
Smuggling
It is easy to understand the threat of huge revenue loss that presence
and easy availability of smuggled cigarettes pose to the economy of Pakistan. The
government is losing a substantial revenue of Rs 3 billion from the smuggling of
cigarettes into the country. According to Aslam Khaliq, the director consumer and
regulatory affairs of Pakistan Tobacco Company, the second top cigarette manufacturer
after Lakson Tobacco, the government is losing at least Rs billion every year due to
cigarette smuggling. He blamed the high taxation as the singular most important incentive
for cigarette smuggling.
This is true if one looks at the global trends of taxation on
cigarettes. Smokers in Pakistan pay the highest tax in the world second only to Denmark
and the UK where 85 per cent and 82 per cent of the retail price respectively goes toward
taxation. In Pakistan, 78 per cent of the retail price of premium brands ( all brands
whose retail price is over Rs 10 per 20 sticks) and 58 per cent of the retail price of low
segment brands go toward taxation.
Price war
Defending the price war started by PTC by slashing the prices of a
number of its middle-priced brands early this year, Aslam said that it brought numerous
domestic manufacturers in the excise duty and sales tax net. For instance, slashing the
prices on some of its brand by 50 per cent from Rs 19 to Rs 9 reduced the excise duty from
63 per cent to 43 per cent with sales tax remaining unchanged at 15 per cent. Despite
price reduction, Aslam said, PTC was able to break even due to increased turnover and at
the same time forced manufacturers who did not pay excise duty and sales tax in the net to
create a level playing field.
Though worried about smuggling and high taxation, Aslam expressed that
cigarette prices in Pakistan are on the much low side. He said that the manufacturers
should be allowed to increase the prices of their products to better their revenues which
are constantly threatened by massive smuggling. He also suggested that price increases
would help discourage smoking in the country.
True. Experience in many countries show that each 10 per cent increase
in cigarette prices results in a 5 per cent decrease in the numbers of smoking adults and
much more in young adults — between 6 to 8 per cent — who have little surplus
funds to spend on smoke. However, the argument that high prices discourage smoking is a
bit flawed particularly in the context of Pakistan.
Number one, unlike all developed and many developing countries Pakistan
choose not to spend even a negligible portion of tobacco taxes on healthcare, research,
education, and anti-smoking activities. Such developing countries, not to mention the
developed ones, as Nepal and Peru spend a share of cigarette taxes to support cancer
research and treatment. Latvia allocates 30 per cent of the revenue which it earns from
the tobacco tax on healthcare. Iran earmarks a portion of tobacco tax revenue on
healthcare and education.
Secondly, if the manufacturers and policy makers are really serious
about reducing smoking in Pakistan through price increases — and no one say that they
are — they need to raise taxes on all brands of cigarettes be it locally manufactured
— imported. Supporting the domestic tobacco industry against imports, as is the case
with Pakistan, may be good for the local industry but negates the very argument that
higher prices and taxation discourages smoking.
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