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Higher tobacco taxes will not hurt Pakistan’s economy

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The Social Policy and Development Centre (SPDC) hosted a webinar to share the findings of its recent research study entitled ‘Economic Implications of Cigarette Taxation in Pakistan: An Exploration through a CGE Model.’ The study estimates the impact of tax increases on tax revenues, consumption of tobacco products, raw tobacco production, cigarette manufacturing, employment, and the overall economy.

Speaking to the webinar, Mr. Muhammad Sabir, Principal Economist, SPDC, stated that excise tax rates on cigarettes in Pakistan, as a share of retail price, are much lower than the widely-accepted benchmark of 70 percent. Currently, the excise tax share of retail price on low-priced and high-priced cigarettes is 41 percent and 57.8 percent, respectively.

It is often argued by the cigarette industry that raising tax will have an adverse impact on the economy. However, the SPDC study reveals that while a reduction in cigarette consumption would result in a decline in the output of raw and manufactured tobacco, the overall impact on the economy (in terms of income, value-added, and output) are positive, though small in magnitude. Therefore, raising excise tax to 70 percent of the retail price would not adversely affect the economy.

Mr. Sabir also added that tobacco farming and cigarette manufacturing make a small contribution to Pakistan’s economy – less than 0.5 percent of the country’s gross domestic product (GDP). The cigarette industry employs 0.2 percent of the industrial labor force.

The study’s simulations suggest that raising excise tax to 70 percent of the retail price would results in a 32.5% decline in consumption of cigarettes while the tax revenue from cigarettes would increase by 102 percent due to higher cigarette prices.

The reduction in tobacco demand would cause a decrease in the output of the cigarette industry by 32.4 percent, leading to a decline in employment in the cigarette industry. However, despite a decline in labor demand in the cigarette industry, the overall labor demand in the economy would increase by 0.5 percent. This is because of increased investment due to higher public savings in the economy.

In absolute terms, there would be a reduction of 13,200 jobs in the tobacco sector while 321,700 jobs will be created in the other sectors, leading to a net increase of 308,500 jobs in the economy. Similarly, an increase in tax revenues would results in higher public savings, which in turn would lead to increased investment in the economy. As a result, the output of the other sectors would increase, leading to an increase in the GDP 0.12 percent.

In summary, raising excise tax would not adversely affect the economy. Dr. Roberto Iglesias, Technical Advisor WHO, also spoke on the occasion and emphasized the need to raise excise tax to curb tobacco use in the country.

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