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A Bold Tax Initiative Dramatically Reduces Cigarette Consumption by a Historic 20 Billion Sticks

A Bold Tax Initiative Dramatically Reduces Cigarette Consumption by a Historic 20 Billion Sticks

Pakistan’s decision to significantly increase the Federal Excise Duty (FED) on cigarettes aligns with the recommendations of the World Health Organization (WHO), according to a press release issued on Friday.

The fiscal year 2022-2023 represented a departure from the previously contentious approach, ending a three-year period of stagnation from 2017 to 2020.

Between 2020 and 2023, minor adjustments were made in response to industry pressure, which argued that higher cigarette taxes led to lower government revenues. However, this notion has been debunked, as the substantial FED rate hikes in February 2023 have resulted in historically high windfall revenues for the government.

The WHO Framework Convention on Tobacco Control (FCTC) identifies taxation as the most cost-effective method to reduce tobacco use. Article 6 of the FCTC highlights tax measures as an effective means of reducing tobacco consumption, particularly among young individuals and low-income groups.

To validate this, Capital Calling recently conducted market research. The survey results demonstrate an inverse relationship between the recent FED increase on cigarettes and cigarette consumption, in line with the WHO FCTC.

The study’s findings indicate that cigarette consumption has declined by more than 11 billion sticks, with 14 percent of smokers quitting following the introduction of higher FED rates. Additionally, approximately 10 percent of smokers reduced their cigarette consumption due to the increased prices. The overall impact on consumption is estimated at around 20 billion sticks per year.

In 2022, total cigarette consumption was estimated to be between 72 to 80 billion sticks, encompassing officially declared production, smuggled cigarettes, counterfeit products, and those on which duties had not been paid. According to the new study, this volume now stands at approximately 62 to 64 billion sticks, directly attributed to the significant FED rate increase.

For the first time in history, the Federal Board of Revenue (FBR) implemented such a substantial FED rate increase, resulting in a significant boost in government revenues. The anticipated government revenue from cigarettes is estimated at Rs. 230-240 billion, a significant increase from Rs. 83 billion in 2017 and Rs. 87 billion in 2018.

The introduction of the controversial third tier in FED on cigarettes directly contributed to an increase in deaths from 160,000 in 2016 to 337,500 deaths in 2020. With the decrease in consumption, it is expected that smoking-related health costs will decrease, and the number of smoking-related deaths will substantially decrease.