By Staff Reporter
ISLAMABAD: The World Bank (WB) has recommended the government to abolish the exiting two-tier system and introduce a single-tier levy on the premium excise duty rate for maximizing revenues from the cigarette industry.
The proposal was made by WB economist Derek Chen during his presentation at the launch of the Pakistan Development Update at the bank’s Islamabad office.
Chen emphasized the need to collapse the two-tier system into a single one and levy the premium excise tax rate on an ad-valorem basis, which would allow for automatic indexation to inflation, ultimately maximizing revenue collection from the cigarette industry.
When asked about the estimates of illicit shares in the cigarette industry, the World Bank stated that it does not have exact figures.
However, the WB has estimated that the introduction of a one-tier taxation system could increase tax revenues by up to 1.09 percent of GDP if the premium rate is applicable to all cigarette brands in Pakistan.
Data from the World Bank also reveals that the actual tax collection from the cigarettes sector in Pakistan stood at 0.19 percent of GDP in the financial year 2019, while there was a potential to collect 0.23 percent of GDP in the same financial year.
The World Bank estimates that the revenue potential stood at 0.73 percent of GDP even after the tax rate on the formal sector was increased by 164 percent in FY2023.
However, if the premium rate was made applicable to all brands, the potential to jack up revenue collection could reach up to 1.09 percent of GDP.
The formal cigarette industry argued that there was a need to understand the dimension of the sector, as the share of illicit cigarettes was estimated to be crossing 40 percent.
With the imposition of a 164 percent hike in taxation on two giant companies during the current fiscal year, the government aims to fetch over Rs 300 billion in revenues.
However, industry sources believe that the tax revenues are bound to decline, as the drastic hike in tax rates has led to a massive decline in sales, resulting in an increase in the share of illicit cigarettes. Their estimates suggest that the revenues would further decline in the remaining period of the current fiscal year.
The World Bank’s recommendation to abolish the two-tier system and introduce a single-tier levy on the premium excise duty rate aims to optimize revenue collection from the cigarette industry in Pakistan.
The proposal, however, has sparked debates and discussions among industry representatives and policymakers, with different viewpoints on the potential impact of such a change.
The government will need to carefully consider all perspectives and thoroughly evaluate the feasibility and implications of this recommendation before making any decisions.
Overall, the issue of cigarette taxation and revenue collection remains a critical aspect of Pakistan’s economic policy, with the need to balance revenue generation with other considerations such as public health and illicit trade.
The decision will require careful consideration and analysis to ensure the best outcome for the country’s economy and the well-being of its citizens.
As the situation unfolds, stakeholders will be closely monitoring the developments and decisions regarding the future of cigarette taxation in Pakistan. Further updates are expected to shed light on the path ahead for this critical policy issue.
Ultimately, the decision will need to consider a comprehensive assessment of various factors to ensure the best outcome for Pakistan’s economy and society.
Only time will tell how this issue will be resolved and what impact it will have on the country’s cigarette industry and revenue collection efforts.
Overall, the World Bank’s recommendation has brought attention to the need for careful consideration and analysis in shaping Pakistan’s cigarette taxation policy moving forward.
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