Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page FC1 The Economics of Tobacco and Tobacco Taxation in Pakistan Shahid Javed Burki Aisha G. Pasha Former Vice President, World Bank Beaconhouse National University, Lahore Hafiz A. Pasha Rijo John Beaconhouse National University, Lahore Indian Institute of Technology, Jodhpur Prabhat Jha Aftab Anwar Baloch University of Toronto Federal Board of Revenue, Pakistan Ghulam Nabi Kamboh Rajeev Cherukupalli Federal Board of Revenue, Pakistan Johns Hopkins University, Baltimore Frank J. Chaloupka University of Illinois at Chicago A uniform specific tax that accounts for 70% of average cigarette price could reduce overall cigarette consumption by 7.5%, increase tax revenues by 27.2 billion Rupees, lead to over half a million users quitting and reduce premature deaths among current adult smokers by over 180,000, while also preventing 725,000 youth from taking up smoking. One of a series of reports on tobacco taxation funded by Bloomberg Philanthropies and the Bill and Melinda Gates Foundation as part of the Bloomberg Initiative to Reduce Tobacco Use. Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page FC2 ISBN: 979-10-91287-10-4 International Union Against Tuberculosis and Lung Disease (The Union) 68 boulevard Saint Michel, 75006 Paris - FRANCE Tel : +33-1 44.32.03.60, Fax : +33-1 43.29.90.87 email: [email protected]; web: www.iuatld.org Suggested citation: Burki SJ, Pasha AG, Pasha HA, John R, Jha P, Baloch AA, Kamboh GN, Cherukupalli R, Chaloupka FJ. The Economics of Tobacco and Tobacco Taxation in Pakistan. Paris: International Union Against Tuberculosis and Lung Disease; 2013 Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page FP1 The Economics of Tobacco and Tobacco Taxation in Pakistan Executive Summary 1 I. Introduction 5 II. Tobacco Use and its Consequences in Pakistan 7 Country Profile 7 Adult Tobacco Use 7 Youth Tobacco Use 8 Cigarette Consumption 10 Health and Economic Consequences of Tobacco Use 10 III. Supply of Tobacco and Tobacco Products in Pakistan 14 Tobacco Farming 14 Cigarette Manufacturing 16 IV. Tobacco Control in Pakistan 18 Rationale for Government Intervention 18 Tobacco Control Policy in Pakistan 19 V. Cigarette Taxes and Prices in Pakistan 22 Tobacco Excise Taxes: Specific and Ad Valorem 22 Structure of Tobacco Taxes in Pakistan 22 Implications of Excise Tax Structures 24 Cigarette Affordability 29 Cigarette Taxes and Prices – Regional Comparison 29 VI. The Demand for Cigarettes in Pakistan 33 Global Evidence 33 Tobacco Demand in South Asia 34 Cigarette Demand in Pakistan — Existing Evidence 36 Cigarette Demand in Pakistan — New Estimates 36 VII. Impact of Cigarette and Tax Increases in Pakistan 38 Impact of Tax Increases on Cigarette Consumption and Tax Revenues 38 Impact on Tax Increases on Public Health 39 Impact on the Poor 41 Tax Avoidance and Tax Evasion 42 Employment 43 VIII. Summary and Recommendations 44 Acknowledgments 48 Bibliography 49 Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page FP2 Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 1 Executive Summary Introduction declines in per capita consumption have accompanied rising cigarette taxes and prices coupled with the Pakistan has one of the largest populations of implementation of stronger tobacco control policies. tobacco users in the world, with over 22 million adults ages 18 or older smoking cigarettes, water pipe, or Given high levels of tobacco use, Pakistan faces some other tobacco product. Almost one-third (32.4%) considerable health and economic consequences from of men and 5.7% of women smoke tobacco, and 15.9% tobacco. Over 100,000 deaths are attributed to tobacco of adult Pakistanis are daily smokers. Despite bans in use each year, with the majority of these deaths recent years, millions of adults use some form of resulting from lung and other cancers, strokes, smokeless tobacco product, including gutka, naswar ischemic heart and other cardiovascular diseases, and and paan. respiratory diseases. Increasing incidence of oral cancer resulting from smokeless tobacco use is of Youth tobacco use is an emerging problem in particular concern and led to a ban on the sale and Pakistan. Recent surveys of in-school youth ages 13 purchase of certain smokeless products in parts of the through 15 years found prevalence rates of current use country (gutka and Mainpuri in Sind province in 2011). of some tobacco product between 6.1% in Lahore and While country-specific estimates are not available, the 14.1% in Karachi. In locations where these surveys death and disease caused by tobacco use imposes have been conducted multiple times, youth tobacco use significant economic costs, including the costs of is higher in the most recent survey than in earlier health care services to treat the diseases caused by surveys. About one in five youth tobacco users tobacco use and the lost productivity that results from consume cigarettes. Also of concern is the relatively absences and premature death among tobacco users. high smoking prevalence among girls. If unchecked, there could be significant increases in smoking Tobacco growing and manufacturing prevalence among women in future years. Pakistan was the 10th largest tobacco growing Available data sources suggest that overall country in the world in 2011, producing more than cigarette consumption has been rising in Pakistan over 100,000 tonnes of tobacco, continuing a long-time slow most of the past two decades, before falling in recent upward trend in tobacco growing. Tobacco is grown years, with per capita cigarette smoking rising by over throughout the country, with more than three-quarters 85% between 1993 and 2007. In more recent years, of the country’s tobacco grown in the Khyber Pakhtunkhwa province (KPK); other key growing areas are located in Punjab and Balochistan. Pakistan is a net Over 100,000 deaths are attributed to exporter of tobacco leaf, but most tobacco grown in the tobacco use each year in Pakistan, with county is used in local tobacco product manufacturing. the majority of these deaths resulting from Employment in tobacco farming accounts for only lung and other cancers, strokes, ischemic 0.4 –0.5% of agricultural employment in Pakistan. heart and other cardiovascular diseases, The cigarette market in Pakistan, as in much of and respiratory diseases. the world, is highly concentrated, with two companies controlling 98% of the market. Pakistan Tobacco Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 2 2 | The Economics of Tobacco and Tobacco Taxation in Pakistan Company, a subsidiary of British American Tobacco, is tobacco product advertising, while a 2009 SRO one of the oldest tobacco companies in Pakistan and prohibited some promotional activities. In 2011, controls 55% of the market currently. In the early legislation requiring minimum pack sizes was 2000s, Lakson Tobacco Company had more than 50% implemented. Pakistan has a national agency for market share. Since 2007, Lakson Tobacco Company tobacco control and tobacco prevention is a national has been almost wholly owned by Philip Morris objective, but the agency has limited staff and International, and in 2011 it was renamed Philip resources. Morris Pakistan Ltd.; it currently controls 43% of the While progress has been made in strengthening market. There are several smaller, domestic cigarette Pakistan’s tobacco control policies, these policies fall companies producing in Pakistan, at least some of short of the strong, comprehensive policies which evade taxes by underreporting production recommended by WHO in guidelines for the various and/or manufacturing counterfeit cigarettes. Very few articles of the FCTC and the existing policies are often Pakistanis are involved in cigarette manufacturing, poorly implemented and enforced, but do appear to be with employment in cigarette manufacturing having a small impact on tobacco use in Pakistan. accounting for less than 0.1% of overall manufacturing employment in Pakistan. Tobacco taxes, prices and demand Tobacco control efforts A 2013 tax structure change resulted in a two- tiered cigarette tax structure. A tax of either 880 or The WHO’s Framework Convention on Tobacco 2335 Rupees per 1000 sticks is levied depending on Control (FCTC), the world’s first public health treaty, whether retail price (price before the addition of value calls for governments to adopt comprehensive policies added tax) is less than or greater than Rs 2286 per to curb tobacco use. Pakistan signed the FCTC on 18 1000 sticks. The system replaced an even more May, 2004, and ratified it later that year, on 3 complicated structure that imposed a specific excise November, 2004. Pakistan’s participation in the FCTC tax on low-priced cigarettes, an ad valorem excise tax has resulted in some advances in tobacco control on high priced brands, and a combination of specific policy, mostly through increasingly strong Statutory and ad valorem taxes on mid-priced brands. Tax Rules and Orders (SROs). incidence rises across the price tiers and cigarette Smoking has been restricted in a variety of public excise taxes in Pakistan account, on average, for just places and private workplaces in Pakistan since 2002, over half of final cigarette prices paid by users, while with the country’s smoke-free policy significantly total taxes on cigarettes account for almost two-thirds strengthened in 2009 by the roll back of an SRO that of final consumer prices. This is below the level in had allowed for the creation of designated smoking countries that have taken a comprehensive approach to areas. Enforcement, however, remains weak and reducing tobacco use, where taxes account for 70% or compliance is low. Textual warning labels have been required for decades and have gradually gotten Low taxes coupled with very low stronger and more specific over time.