Smokers constitute the most miserable group of taxpayers in Pakistan. An increase in the tax rate on any group of individuals normally leads to a public outcry. But the government receives little criticism when it jacks up taxes on cigarettes every year.
It is a sin tax, the government says, which discourages a bad lifestyle while generating additional tax revenues.
No wonder just one tobacco company operating in Pakistan paid Rs86.5 billion in taxes last year, which is more than the total income tax paid by 1.37 million salaried individuals in 2014-15.
Sin taxes are wrong because of two reasons. Firstly, they undermine personal choice. Taxation is a fiscal tool. Its use for social engineering can be disastrous. The government should not tell people what kind of lifestyle they should have. Values and social behaviour are best determined by society, family and friends, not government officials.
Moreover, there is no guarantee a future government will not add more “sins” to the list of sin taxes. What if cinemas, concerts and even junk food are someday deemed fit for the imposition of a sin tax in Pakistan?
Secondly, statistics show the whole argument that higher taxes discourage smoking is lopsided. A recent study by global research firm Nielsen shows the smoking incidence remained “virtually unchanged” between 2008 and 2013 in Pakistan despite a rapid increase in taxes on cigarettes. The volume of cigarettes consumed has simply shifted from the tax-paid segment to the illicit segment, the report says.
This leads us to the commonly held belief that smoking increases government revenues. It doesn’t. Rising tax rates have only paved the way for tax evasion and increased illicit trade of cigarettes in Pakistan. Nearly 24% of gross trade of cigarettes in Pakistan is illicit. As a result, the national kitty is losing Rs24 billion a year, Nielsen says.
Despite 25 laws and 13 agencies to control illicit trade of cigarettes, its share in the gross trade volume has grown 43.5% in six years. In contrast, the volume of tax-paid cigarettes has shrunk 11% over the same period.
Excessive taxes on a product that is legal to consume create two problems. One, the government becomes increasingly dependent on an activity for revenues that it otherwise claims to discourage. Two, unrealistically high taxes give law-abiding people a motivation to violate the law.
The government should strive for economic growth to increase its tax collection. Relying on ‘sinful’ taxpayers under the guise of promoting healthy lifestyles is not a sound policy.