LUMS Study Reveals Impact of High FED on Cigarette Market

A recent study conducted by Lahore University of Management Sciences (LUMS) sheds light on the negative consequences of high Federal Excise Duty (FED) rates on the legal cigarette market in Pakistan. The study, titled 'Impact of Taxation on the Cigarette Sector in Pakistan,' emphasizes the urgent need to address the effects of tax policies, particularly FED adjustments, on the country's cigarette industry.

The research indicates that while the current tax system boosts government revenue from the tobacco sector, it may not be sustainable in the long term. The study reveals that the continuous increase in FED rates results in significant annual revenue losses for the Federal Board of Revenue (FBR), amounting to around Rs300 billion. This loss is mainly due to the presence of illicit cigarette brands that evade taxes and enter the market through smuggling.

The study stresses the importance of implementing a fair and effective tax policy to combat tax evasion and ensure fair competition among all cigarette manufacturers. It also highlights the necessity of robust enforcement measures, broadening the tax base, and enhancing public awareness to tackle the adverse effects of illicit trade on Pakistan's economy.

According to the report, a primary survey conducted as part of the study indicates that a considerable portion of cigarette sales in Pakistan involves illicit brands, potentially leading to tax evasion of Rs300 billion. The research suggests that the continuous rise in excise rates disproportionately impacts legal companies, resulting in a decline in their market share.

The study recommends that the government's initiatives to curb illicit trade, such as the Track and Trace System, should be more comprehensive and strictly enforced across all sectors. By expanding the tax base and adopting a holistic enforcement approach, the government can potentially reduce the prevalence of illicit trade and tax evasion, benefiting the legal cigarette industry.

The report proposes a review of the current excise tiers considering the price sensitivity of the Pakistani market and the widespread availability of illicit brands. Adjusting the excise structure could help prevent the substitution of higher-priced legal brands with cheaper illicit alternatives, safeguarding tax revenues and fostering a healthier industry.