Executive Summary

Cigarettes are inexpensive in Pakistan and are by far the most widely sold tobacco product in the country . The most popular brands cost PKR 18.40 per pack of 20 (USD 0.25 per pack at the current exchange rate). In part because cigarettes are inexpensive, annual consumption of cigarettes has increased (from 292 cigarettes per capita in 1994 to 406 cigarettes per capita in 2007). This raises serious health concerns. A proven intervention to reduce smoking is to raise the price of cigarettes relative to other products by increasing excises on cigarettes. Although Pakistan adjusts its cigarette excises almost every year, the rates have not kept pace with inflation and the growth of per capita income. Excise revenue has fallen from 0.5 percent of GDP in 1994 to 0.3 percent of GDP in 2007. This report assesses Pakistan’s excises on cigarettes.

Domestic cigarettes are classified into three tiers based on the retail price before value added tax (VAT). Each tier is subject to a different excise regime. Cigarettes in Tier I (the lowest-priced cigarettes) are subject only to a specific excise of PKR 6.34 per pack. Cigarettes in Tier II (cigarettes in the mid-price range) are subject to mixed regime comprising a PKR 6.34 per pack specific excise and an incremental 69 percent ad valorem excise. Cigarettes in Tier III (the highest-priced cigarettes) are subject only to a 63 percent ad valorem excise.

To reduce consumption, increase government revenue, and simplify the excise regime, Pakistan should return to a two-tier regime similar to what was abandoned in 2001. For cigarettes priced lower than PKR 28.00 per pack-the first tier-the excise would be a specific rate of PKR 15.00 per pack. For cigarettes priced PKR 28.00 per pack or higher-the second tier-the excise tax would be 63 per cent of the retail price before VAT. Going forward, the specific rate and the price bracket between the two tiers would be automatically indexed for inflation. Under the proposal, over 80 percent of all cigarettes would be in the first tier and subject to the specific excise.

Assuming the excise tax is fully passed through to consumers, adoption of this proposal will lead to a 50 percent increase in the price of the most popular brands and more than double the excise tax on these brands. Consumption of cigarettes will decline by 18 percent, providing significant health benefits, and the government’s revenue from cigarette excises will increase by 47 percent.