The alarming situation highlighted by British American Tobacco (BAT) underscores a critical policy misstep in Pakistan’s taxation strategy on cigarettes. The substantial increase in taxes, intended to boost government revenue, has paradoxically led to a significant decline in sales of regulated tobacco products and a surge in the illicit market. This unintended consequence points to a fundamental flaw in the fiscal approach: heavy taxation on legal products drives consumers towards cheaper, unregulated alternatives, undermining public health objectives and diminishing tax revenues. The 38% drop in sales of tax-paid cigarettes and the 58% rise in illicit market share highlight the counterproductive nature of these policies.

Moreover, the limited increase in government revenues, despite the 73% hike in federal excise duty, reveals a disconnect between policy intentions and economic realities. An 8% real-term revenue growth does not compensate for the broader economic losses, including potential job cuts, reduced business activities, and weakened investor confidence. BAT’s warning about withdrawing investment should remind policymakers of the fragile balance needed in tax policy. Overburdening an industry, particularly one with significant fiscal contributions, can have far-reaching adverse effects beyond immediate revenue targets.

The concerns raised by BAT’s Michael Dijanosic touch on a broader issue of regulatory effectiveness. While increasing taxes on tobacco aligns with public health goals, failing to simultaneously crack down on the illicit market neutralizes these benefits. Consumers continue smoking but opt for cheaper, non-taxed alternatives, negating health benefits and depriving the state of critical tax income. Addressing the illicit trade must go hand-in-hand with any tax hikes to ensure that public health benefits and revenue goals are met.

The interaction between BAT and Pakistani authorities, including the Special Investment Facilitation Council (SIFC), reflects an urgent need for a recalibrated approach. The projected 25% excise duty increase could further strain the sector, potentially dropping tobacco revenues by 15% next fiscal year. Policymakers must consider the broader economic ecosystem and the delicate balance of taxation, enforcement, and public health. Without this, the adverse outcomes witnessed in the past year may deepen, risking fiscal stability and the broader economic welfare and regulatory integrity of Pakistan.

In Pakistan, the soaring prices of tobacco products, fueled by heavy taxes and widespread smuggling, pose significant challenges to the economy. However, amidst these challenges lies an opportunity: the promotion of local tobacco industries to spur economic growth. Taxes on tobacco products have inflated prices, making them unaffordable for many and fueling demand for cheaper smuggled alternatives. This cycle undermines the economy by depriving the government of revenue and hindering the growth of local industries.

Pakistan must prioritize developing local tobacco industries. Supporting domestic production can reduce reliance on imports, create jobs, and stimulate economic activity across various sectors. Investing in local tobacco industries means investing in the broader economy. A thriving tobacco sector generates opportunities in manufacturing, distribution, and beyond, fostering economic resilience and prosperity. Supporting local farmers and entrepreneurs aligns with broader developmental goals, driving inclusive growth and rural development.

Realizing these benefits requires coordinated effort. Government policies must incentivize domestic production and crack down on smuggling networks, while industry players should invest in research and development to enhance product quality and competitiveness. The consequences of inaction are dire. Continued smuggling of tobacco products not only deprives the government of revenue but also undermines the growth potential of local industries. Moreover, it erodes investor confidence, deterring foreign direct investment (FDI) essential for economic development.

Foreign investors in tobacco-producing companies may reconsider their investment strategies if smuggling persists. Uncertainty surrounding market integrity and regulatory enforcement can discourage FDI, limiting access to capital and technology crucial for industry growth. Consequently, Pakistan risks falling behind in the global market, losing out on opportunities for innovation and expansion.

TANZEEL KHANZADA,

Karachi.