Policy Brief - Facts vs Industry Narrative: - Cigarette Production and Taxation in Pakistan

The tobacco industry, however, has been trying to thwart these initiatives by creating a false narrative about the implications of higher taxation in terms of reduced production of tax-paid cigarettes and the consequent reduction in tax revenues. [...] It has been claimed by the industry that the tax hike would negatively impact the profitability of the cigarette industry and encourage the trade of non-tax-paid cigarettes.1 This policy brief aims to present some facts related to these claims and argues that the current tax reform would result in generating more tax revenues for the government despite the reduction in cigarette production. [...] In April 2022, the prices increased to PKR87.5 and PKR194 for the same respective brands; and in percentage terms, the net-of-tax price increase was 25.7 percent and 38.2 percent, respectively. [...] As shown in Figure 2, the largest increase in cigarette prices occurred in March 2023, while the largest decrease in production occurred in July 2023. [...] Impact of tax revenues Figure 3: Trends in production (millions of cigarette sticks) Based on SPDC’s cigarette tax simulation model, the 2,662 estimates of the net impacts of changes in tax rates Mar 5,291 and production on tax revenues are presented in Feb 4,171 4,666 Figure 4.