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

Federal Board of Revenue, Pakistan
University of Toronto

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. In 2010, an SRO
replaced the text warning with a rotating, graphic manufacturers’ prices result in
warning label that is required to cover 40% of the front cigarette prices in Pakistan being
and back of cigarette packs. A 2002 ordinance among the lowest in the world.
restricted but did not comprehensively ban a variety of
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 3

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 3

more of price and well below the 70% excise tax share
in final cigarette price recommended by WHO. The low Eliminating the tiered tax structure and
taxes coupled with very low manufacturers’ prices adopting a uniform specific excise tax
result in cigarette prices in Pakistan being among the
of 31.2 Rupees per pack will lead over
lowest in the world. Moreover, infrequent increases in
half a million current Pakistani cigarette
taxes have led to falling real cigarette prices for much
of the past two decades. Additionally, increases in real smokers ages 18 and older to quit
incomes over this time have made cigarettes smoking, while preventing almost
increasingly affordable. Recent tax and price increases 725,000 youth under 18 from taking up
have reversed these trends, with real prices rising and
cigarette smoking.
cigarette affordability falling over the past few years
contributing to declines in per capita cigarette
consumption in Pakistan.

Extensive research from a growing number of addition, this tax and price increase will lead over one-
countries has documented the inverse relationship half million current Pakistani cigarette smokers ages
between tobacco product prices and consumption. 18 and older to quit smoking, while preventing almost
Pakistan is no exception. Existing evidence as well as 725,000 Pakistani youth under 18 from taking up
new estimates produced for this report reiterate the cigarette smoking. Together, these reductions in
finding that falling cigarette prices lead to increases in smoking will prevent over half a million premature
smoking, while rising prices reduce smoking, all else deaths caused by tobacco use in the current population
constant. These estimates indicate that a 10% increase cohort. At the same time, because of the inelasticity of
in average cigarette prices in Pakistan will lead to an cigarette demand, the tax increase will generate over
almost 5% reduction in cigarette consumption. In 27 billion Rupees (US$0.3 billion) in new cigarette tax
addition, new evidence produced for this report shows revenues. A larger tax increase — one that taxes all
that rising incomes will lead to significantly more brands at the highest current tax applied of 44 Rupees
smoking in Pakistan, consistent with the existing per pack of 20 cigarettes — would have a much greater
empirical evidence for most low- and middle-income public health impact, while generating even higher
countries. revenues.

Impact of tax increases on public health and Recommendations

tax revenues
Given this evidence, we make the following
Based on existing and new estimates, we modeled recommendations:
the impact of changes in the existing tax structure and
rates. Eliminating the tiered tax structure and adopting 1. Adopt a high uniform specific cigarette excise tax
a uniform specific excise tax of 31.2 Rupees per pack of that significantly raises cigarette prices and
20 cigarettes, so that the cigarette excise tax would reduces tobacco use.
account for 70% of final prices, as recommended by 2. Implement annual adjustments to tobacco tax
WHO would raise average prices by over 15% percent rates so that they retain their real value over time
and reduce cigarette consumption by 7.5%. In and are not eroded by inflation.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 4

4 | The Economics of Tobacco and Tobacco Taxation in Pakistan

3. Implement annual adjustments to tobacco excise 5. Strengthen tobacco tax administration, increase
tax rates so that they result in increases in tobacco enforcement, and tax duty free sales of tobacco
product prices that are at least as large as products in order to reduce tax evasion and
increases in per capita incomes. avoidance.

4. Increase taxes on other tobacco products to be 6. Earmark tobacco tax revenues for health
equivalent to cigarette taxes and to reduce the use purposes, including health promotion and
of these products. tobacco control.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 5

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 5

I. Introduction relatively comprehensive and cover health care and

educational (including university) facilities, government
Tobacco smoking and other forms of tobacco use buildings, indoor workplaces, restaurants, public
impose a large and growing public health burden transport and other indoor public places, but
globally and in Pakistan. Globally, tobacco use currently compliance with these policies is low. Tobacco
causes 5.4 million premature deaths each year, and if advertising is allowed on television and radio, in local
current trends are unchecked, one billion people will die magazines and newspapers, on billboards and outdoors,
from tobacco use in the 21st century.1 Tobacco use and at the point of sale. Tobacco company sponsorship
imposes considerable economic costs, both in terms of of public events is banned, as are promotional
the health care expenses incurred to treat the diseases discounts. Distribution of free samples is allowed.
caused by tobacco use and from the lost productivity Graphic health warnings are required on cigarette
resulting from tobacco-related illnesses and premature packages, but other constraints on packaging and
death. Pakistan is one of the largest tobacco consuming labeling have not been adopted. Tobacco excise taxes
countries in the world, with over 22 million persons ages have increased over time, but tobacco products have
18 and older smoking tobacco products.2 Tobacco become more affordable over time and significant tax
smoking in Pakistan is split among a variety of different increases have not been adopted to curb tobacco use.
products, with many consuming manufactured The existing tax structure is complex, keeping some
cigarettes, while others consume, water pipe, and/or products relatively inexpensive while creating
other tobacco products. Men are much more likely to opportunities for tax avoidance and tax evasion. The
smoke than women, with smoking prevalence among cigarette market in Pakistan is almost entirely
men at 32.4% as compared to 5.7% among women. controlled by two firms — the Pakistan Tobacco
Despite a subnational ban, smokeless tobacco product Company, Ltd., a subsidiary of British American
use is widespread, with smokeless users consuming Tobacco (BAT), and Philip Morris Pakistan, Ltd.
gutka, naswar, and paan. In addition, a significant
In this report, we briefly describe the tobacco
number of Pakistani youth are taking up tobacco use —
environment in Pakistan, beginning with a discussion of
17.5% of boys and 9.6% of girls ages 13 through 15 in
tobacco use and its health and economic consequences,
Karachi were found to use some tobacco product.3
followed by a brief review of the supply of tobacco and
The growing recognition of the health and tobacco products. Given available data, most of the
economic consequences of tobacco use have led many in discussion focuses on manufactured cigarettes. We then
civil society to call for the adoption and implementation provide a short description of tobacco control policies in
of strong tobacco control measures, prompting policy Pakistan followed by a more detailed discussion of
makers to introduce a variety of legislation. To date, tobacco taxes and prices. Existing evidence on the
however, these efforts have been met with strong effects of prices on tobacco use is presented and this
opposition from the tobacco industry and existing evidence is used to estimate the impact of alternative tax
policies are limited and often poorly complied with. increases on consumption, excise tax revenues, tobacco
While the country has signed and ratified the WHO use prevalence, and future deaths from tobacco use
Framework Convention on Tobacco Control,4 much among those in the current population cohort. The
progress remains on meeting the obligations and report concludes with recommendations for future
guidelines of the treaty.5 Smoke-free policies are tobacco tax policy in Pakistan.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 6

6 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Endnotes to Chapter I

World Health Organization. WHO Report on the Global Tobacco Epidemic, 2008: The MPOWER Package. Geneva: World Health
1

Organization. 2008.
World Health Survey. Report of Pakistan. Geneva: World Health Organization. 2003.
2

Global Youth Tobacco Survey. Karachi, Pakistan (Ages 13-15) Global Youth Tobacco Survey (GYTS) Fact Sheet. Atlanta GA: U.S.
3

Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National Center for
Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. 2008.
World Health Organization. WHO Framework Convention on Tobacco Control. Geneva: World Health Organization. 2003.
4

World Health Organization. WHO Report on the Global Tobacco Epidemic, 2011: Implementing Smoke-Free Environments. Geneva:
5

World Health Organization. 2011.

Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 7

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 7

II. Tobacco Use and its an average annual growth rate of over 3.9% in GDP

Consequences in Pakistan between 2006 and 2011. Poverty rates have fallen over
time with economic development. 22.3% of the country
Pakistan is one of the largest tobacco consuming was estimated to live in poverty in 2006. Literacy is low
countries in the world. Tobacco is consumed in many but improving, with the literacy rate in 2009 estimated
forms in Pakistan, including smoking of manufactured at 54.9% for those ages 15 years and older.
cigarettes, and waterpipe (shisha), and chewing of
gutka, naswar and paan. Cigarettes account for most of Adult Tobacco Use
smoked tobacco consumption. Limited survey data
Based on data from the World Health Survey
suggest that overall smoking prevalence has been flat in
conducted in 2003,2 19.1% of Pakistanis ages 18 and
Pakistan since the mid-1990s, while cigarette
older smoke some type of tobacco product, with 15.9%
consumption has been rising. Initiation of tobacco use
reporting daily smoking. Men are nearly six times as
appears to occur at relatively older ages in Pakistan, but
likely to smoke as women, with prevalence rates of
a large number of Pakistani youth have tried smoking
32.4% and 5.7%, respectively. Most smokers consume
and many consume tobacco products. This section
manufactured cigarettes, with daily cigarette smoking
provides some background on Pakistan, and describes
prevalence of 10.2% among adults, including 18.1%
the levels of and trends in tobacco use and the resulting
among men and 1.8% among women. While detailed
health and economic consequences.
national data is not available, studies find that many
Pakistani adults smoke other forms of tobacco,
Country Profile including water-pipe. One recent study for Rawalpindi
The Islamic Republic of Pakistan is divided into found that among daily tobacco users, 13.5% used a
four provinces (Punjab, Sindh, Khyber Pakhtunkhwa smokeless tobacco product and 18% smoked water-
(KPK; previously known as the Northwest Frontier pipe. Given estimates of the population ages 18 and
Province (NWFP)), Balochistan) in addition to the older in 2012 of over 115 million, the national
Islamabad Capital Territory, two autonomous prevalence rates suggest that there are nearly 22.1
territories (Azad Kashmir and Gilgit-Baltistan) and the million adult smokers in Pakistan and millions more
Federally Administered Tribal Areas. Below this, there who chew some form of tobacco, primarily gutka,
are 27 divisions, over 100 districts or zillahs, and over naswar, and paan.
400 sub-districts or tehsils. Pakistan is a rapidly
Smoking prevalence in Pakistan has been assessed
developing market economy with a growing share of
only twice in the past two decades — in 1994 and 2003.
service and industry sectors.

Pakistan’s estimated population in 2013 is over

As reported in the World Health Survey
193 million and the country is ethnically diverse. The
conducted in 2003, 19.1% of Pakistanis
population is relatively young, with over 45% under the
age of 20 years compared to just over 4% ages 65 years ages 18 and older smoke some type of
or older. With per capita national income of US$1290 tobacco product, with 15.9% reporting
in 2012, Pakistan is classified by the World Bank as a daily smoking. Prevalence rates among
lower-middle-income country. Economic growth in
men are as high as 32.4%.
Pakistan, however, has been steady in recent years, with
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 8

8 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Survey methods and samples varied between the Smoking initiation appears to occur at later ages in
surveys, but the data suggest that smoking prevalence Pakistan than in many other countries, with prevalence
has been largely flat among Pakistani adults over rates peaking in middle age for both men and women,
time. In 1994, 28.5% of men ages 15 and older as shown in Graph 2.2. In addition, smoking prevalence
reported daily smoking, while 27.3% of men ages 18 is higher in rural areas than in urban areas. Cigarette
and older in 2003. Similarly, daily smoking consumption per smoker is relatively modest, with the
prevalence among women ages 15 and older was 3.4% average daily male smoker smoking 8.5 cigarettes per
in 1994, compared to 4.4% among women ages 18 and day and the average daily female smoker consuming 4.3
older in 2003. cigarettes per day.

About one in six smokers smoke less than daily,

Youth Tobacco Use
with women smokers more likely to smoke less than
daily than male smokers. About two-thirds of daily Youth tobacco use is an emerging problem in
male smokers are cigarette smokers. Most smokeless Pakistan. The Global Youth Survey has been conducted
tobacco use is in the form of gutka, smuggled in from in multiple locations in Pakistan, including twice in
India, and naswar, which is largely produced illegally some locations (Graph 2.3). The prevalence of current
at home or in small local factories.6 About 70% of tobacco use among in-school youth ages 13 to 15 years
smokeless tobacco users are males, and 30% females; varies considerably by location, with rates ranging from
smokeless tobacco users are older on average.6

As in high-income countries, as well as a The prevalence of current tobacco use

growing number of low- and middle-income among in-school youth ages 13 to 15
countries, adult smoking prevalence in Pakistan is years ranges from 6.1% in Lahore to 14.1%
lowest among those with the highest socioeconomic in Karachi in the 2008 surveys.
status, as shown in Graph 2.1.

Graph 2.1: Smoking Prevalence by Income Quintile, Pakistan, 2003

25%

20%

15%

10%

5%

0%
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5
Source: WHS, 2003.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 9

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 9

Graph 2.2: Smoking Prevalence, by Age and Gender, Pakistan, 2003

50% Total
Men
Women
40%

30%

20%

10%

0%
18–29 30–39 40–49 50–59 60–69 70–100
Source: WHS, 2003.

Graph 2.3: Prevalence of Current Tobacco Use, 13–15 Year Olds, by

Gender, Pakistan
18% Total
Boys
15% Girls

12%

9%

6%

3%

0%
Islamabad Karachi Kasur Lahore Lahore Quetta Quetta Peshawar Peshawar
(2003) (2008) (2004) (2003) (2008) (2004) (2008) (2004) (2008)

Source: GYTS, various years.

6.1% in Lahore to 14.1% in Karachi in the 2008 surveys. A related concern is the relatively high prevalence of
Data from locations surveyed more than once suggest smoking among girls in the various GYTS done in
that tobacco use is rising among Pakistani youth. Pakistan. Girls are just over half as likely to report
Current tobacco use prevalence among Lahore youth tobacco use, on average, in the various GYTS, with the
rose from 4% in 2003 to 6.1% in 2008. Most tobacco use gap in tobacco use prevalence rates for girls and boys
by youth is of smokeless products rather than cigarettes.3 much smaller than that for prevalence among women
and men. If similar patterns persist, the relatively high
Boys are more likely to use tobacco products than
prevalence rates among 13 to 15 year old girls suggest
girls, particularly when it comes to cigarette smoking.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 10

10 | The Economics of Tobacco and Tobacco Taxation in Pakistan

that future tobacco use prevalence rates among women

may be higher than they are currently.7 Exposure to tobacco company advertising is
high in Pakistan, with about two in three
Also of concern are the high rates of youth
exposure to secondhand smoke, with more than one- surveyed youth reporting seeing billboard
fifth of youth reporting having been exposed at home, advertising and ads in newspapers or
and about one in three reporting being exposed to magazines in the month prior to the survey.
tobacco smoke outside the home. The vast majority of
youth surveyed before 2008 were unaware of the risk
of exposure to secondhand smoke, but more than half
use prevalence are associated with stronger tobacco
of youth surveyed in 2008 did agree that being exposed
control policies.
to tobacco smoke was harmful to them. In all surveys,
a significant majority of youth supported a Virtually all cigarettes sold in Pakistan are filter-
comprehensive ban on smoking in public places. tipped, and about 85% of these use Virginia tobacco;
an additional 10% use an American blend of tobacco.6
Exposure to tobacco company advertising is high,
Mid tar brand cigarettes account for about 90% of the
with about two in three Pakistani youth reporting
market, while low tar brands account for less than 4%
seeing billboard advertising and ads in newspapers or
of the market. Few Pakistani cigarette smokers smoke
magazines in the month prior to the survey. Exposure
menthol brands, which account for only 4% of the
to other tobacco marketing is lower and falling. About
market. In 2010, about 60% of cigarettes were sold in
one in five youth surveyed in earlier years reported
packs of 20, with 10-packs accounting for 30% of the
being offered free cigarettes, but by 2008, this was
market and 14 packs accounting for the remainder. The
down by more than half. Relatively few Pakistani youth
sale of cigarette packs containing less than 20 sticks
report owning cigarette branded merchandise.
has since been banned in Pakistan (with effect from
Tobacco industry messages appear to be at least partly
October 1, 2011).
offset by mass-media and school based education
programs, with more than three-fourths of youth
Health and Economic Consequences of
reporting that they have seen anti-smoking messages
Tobacco Use
in the media in the past month and more than half
reporting having been taught in school during the past Currently, tobacco use causes nearly six million
year about the dangers of smoking. deaths per year worldwide — more than one in ten
adult deaths. About 70% of current tobacco-
Cigarette Consumption attributable deaths occur in low- and middle-income
countries.10 In an extensive study in India, the
Cigarette consumption has been rising in Pakistan
proportion of tobacco-attributable deaths occurring at
for most of the past two decades, both in the aggregate
and per capita.8,9 Between 1997 and 2008, aggregate
Between 1997 and 2008, aggregate cigarette
cigarette consumption rose by nearly 55%, before
peaking in 2008 at over 76 billion cigarettes (Graph
consumption rose by nearly 55%, before
2.4). Per capita consumption rose by nearly 23% peaking in 2008 at over 76 billion cigarettes.
between 1997 and its peak in 2007 (Graph 2.4). In Per capita consumption rose by nearly 23%
recent years cigarette consumption has begun to fall in between 1997 and its peak in 2007.
Pakistan. In country after country, declines in tobacco
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 11

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 11

Graph 2.4: Aggregate and Per Capita Cigarette Consumption, Pakistan, 1997–2010

Total Per capita

80,000 500
Total cigarette consumption (million sticks)

Cigarette sticks consumed per capita

70,000 450
400
60,000
350
50,000
300
40,000 250

30,000 200
150
20,000
100
10,000
50
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Euromonitor International, 2012.

ages 30–69 was established at 70%.11 Given current

trends, tobacco-attributable deaths are expected to rise About half of all tobacco deaths
to 8.3 million by 2030.12 While deaths caused by occur between the ages of 35 and
tobacco are expected to fall in high-income countries, 69, resulting in a loss of 20 to 25 years
they are expected to double to 6.8 million in low- and of life for smokers versus
middle-income countries by 2030.11
nonsmokers.
Globally, about half of all tobacco deaths occur
between the ages of 35 and 69, resulting in a loss of 20 In Pakistan, tobacco use is estimated
to 25 years of life for smokers versus nonsmokers.10 to kill over 100,000 people each year.
Smoking cessation, however, is effective in reducing
the health consequences of smoking, with those who
quit before middle age avoiding almost all of the excess
majority of these deaths result from lung and other
health risks associated with continued smoking.10,13
cancers, strokes, ischemic heart and other
Recent studies from high income countries find that
cardiovascular diseases, and respiratory diseases. Of
those who quit before age 40 avoid about 90% of the
particular concern are the high rates of oral cancer, with
excess mortality risks of continuing to smoke, and that
the Pakistan Medical Association reporting 1.5 million
continuing smokers face a loss of one decade of life.14–18
and rising cases, including many among children under
In Pakistan, tobacco use is estimated to kill over the age of 12 years, resulting from gutka and other
100,000 people each year.19* As in other countries, the smokeless tobacco use.20

* A different estimate suggests a higher toll of as many as 360,000 deaths a year.

6
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 12

12 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Estimates for Bangladesh and India may provide some

The Pakistan Medical Association insight into the likely magnitude of the economic costs
reported 1.5 million and rising cases of in Pakistan. A very conservative estimate of the
oral cancer, including many among economic costs of tobacco use in Bangladesh in 2004 is
children under the age of 12 years, US$1.85 billion, over 3% of GDP in 2004.22 Similarly,
in India in 2004, the estimated health care costs of
resulting from gutka and other
treating diseases caused by tobacco use were US$1.3
smokeless tobacco use. billion, with an additional US$502 million in lost
productivity costs.23 Together, these costs accounted
for over 0.7% of GDP in India in 2004, almost certainly
Given the numerous diseases caused by tobacco a significant underestimate given that the economic
use, the health care costs of treating these diseases are cost estimates were based on four major categories of
substantial. In addition to the sizable health care costs tobacco-related diseases.
resulting from tobacco use, the premature deaths and
Tobacco use also has a distributional dimension
disability caused by smoking result in significant lost
given that it is more prevalent among groups with
productivity. In most high-income countries, these
lower socioeconomic status in Pakistan. In addition to
costs are about the same or slightly higher than the
the greater burden of disease, increased health care
health care costs caused by smoking.21
spending, and lost productivity incurred by those most
To date, there are no studies that have estimated economically vulnerable, poor households’ spending
the economic costs of tobacco use in Pakistan. on tobacco diverts resources from other needs.

Endnotes to Chapter II

Euromonitor International. Pakistan: Country Sector Briefings. London: Euromonitor International. 2010.
6

Global Youth Tobacco Survey. Pakistan (Ages 13-15) Global Youth Tobacco Survey (GYTS) Fact Sheets - various cities and years.
7

Atlanta GA: U.S. Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention,
National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. 2012. Available at:
http://www.cdc.gov/tobacco/global. Accessed January 20, 2012.
Euromonitor International. Pakistan: Country Sector Briefings. London: Euromonitor International. 2011.
8

ERC Group. World Cigarettes 1/2009. Suffolk, England: ERC-World. 2009.

9

Jha P, Chaloupka FJ, Moore J, Gajalakshmi V, Gupta PC, Peck R, Asma S, Zatonski W. Tobacco addiction. In: Jamison DT, Breman JG,
10

et al. eds., Disease control priorities in developing countries. 2nd ed. Washington DC: International Bank for Reconstruction and
Development/World Bank. 2006;869-885.
Jha P, Jacob B, Gajalakshmi V, et al. A nationally representative case-control study of smoking and death in India. N Engl J Med. 2008
11

Mathers CD, Loncar D. Projections of Global Mortality and Burden of Disease from 2002 to 2030. PLoS Med. 2006; 3(11): e442. Available
12

at: http://www.plosmedicine.org/article/info:doi/10.1371/journal.pmed.0030442. Accessed March 31, 2010.

International Agency for Research on Cancer. Tobacco Control: Reversal of Risk after Quitting Smoking, IARC Handbook of Cancer
13

Prevention, Volume 11. Lyon, France: International Agency for Research on Cancer. 2007.
Doll R, Peto R, Boreham J, Sutherland I. Mortality from cancer in relation to smoking: 50 years’ observations on British doctors Br J
14

Cancer 2005.
Kirstin Pirie , Richard Peto, Gillian K Reeves, Jane Green, Valerie Beral for the Million Women Study Collaborators The 21st century
15

hazards of smoking and benefits of stopping: a prospective study of one million women in the UK. The Lancet - 12 January 2013 ( Vol.
381, Issue 9861, Pages 133-141 ).
Thun MJ, Carter BD, Feskanich D, et al. 50-Year trends in smoking-related deaths in the United States. N Engl J Med 2013;368:361-374.
16

Prabhat Jha, et al. 21st-Century Hazards of Smoking and Benefits of Cessation in the United States. N Engl J Med 2013; 368:341-350.
17
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 13

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 13

Sakata R, McGale P, Grant EJ, Ozasa K, Peto R, Darby SC. Impact of smoking on mortality and life expectancy in Japanese smokers: a
18

prospective cohort study. British Medical Journal 2012 Oct 25;345:e7093.

Global Burden of Disease [database on the internet]. Institute for Health Metrics and Evaluation (IHME). Available from
19

healthmetricsandevaluation.org/gbd/.
Euromonitor International. Tobacco in Pakistan: Industry Overview. London: Euromonitor International. 2013.
20

Centers for Disease Control and Prevention. Annual smoking-attributable mortality, years of potential life lost, and economic costs---
21

United States, 2000--2004. Morbidity and Mortality Weekly Report. 2006;57(45);1226-1228.

World Health Organization. Impact of Tobacco-related Illnesses in Bangladesh. New Delhi, India: World Health Organization, Regional
22

Office for South-East Asia. 2007.

John RM, Sung HY, Max W. Economic cost of tobacco use in India, 2004. Tobacco Control. 2009;18:138-143.
23
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 14

14 | The Economics of Tobacco and Tobacco Taxation in Pakistan

III. Supply of Tobacco and

In 2010, the acreage devoted to tobacco
Tobacco Products in Pakistan
growing accounted for only 0.27% of
Pakistan was the 10th largest tobacco growing acreage for all crop production and, in
country in the world in 2011, producing just over 2009, the value of the tobacco grown was
100,000 tonnes of tobacco.24 Tobacco is grown only 0.44% of the value of all agricultural
throughout the country, with more than three-quarters
production.
of the country’s tobacco grown in the KPK (NWFP).
Other important tobacco growing areas are located in
Punjab and Balochistan. Pakistan is a net exporter of
of this comes from the Swabi, Mardan, and Charsadda
tobacco leaf, but most tobacco grown in Pakistan is
districts. Tobacco is grown elsewhere in Pakistan,
used in local tobacco product manufacturing.
including in the Punjab and Balochistan provinces.
The cigarette market in Pakistan, as in much of While widely grown, tobacco is a relatively minor crop in
the world, is highly concentrated. Pakistan Tobacco agriculture as a whole in Pakistan. In 2010, the acreage
Company, Ltd. (PTC) a subsidiary of British American devoted to tobacco growing accounted for only 0.27% of
Tobacco (BAT) is the largest and one of the oldest acreage for all crop production and, in 2009, the value of
tobacco companies in Pakistan. After many years as a the tobacco grown was only 0.44% of the value of all
minority stakeholder in Lakson Tobacco Company, agricultural production.24
Ltd. (LTC), Philip Morris International (PMI) acquired
The acreage devoted to tobacco growing in
nearly complete control of LTC in 2007, and, in 2011,
Pakistan peaked in the late 1960s, before East Pakistan
renamed itself Philip Morris (Pakistan) Limited
gained independence and became Bangladesh. For the
(PMPKL). Together, the two control 98% of the
past 25 years, acreage devoted to tobacco growing has
cigarette market in Pakistan. Many small, local
trended upwards, albeit unevenly (Graph 3.1). In 2011,
cigarette manufacturers account for the remainder.
tobacco was grown on just over 51,000 hectares, up
This section briefly describes the supply side of over 31% from a low of just under 39,000 hectares in
the tobacco leaf and cigarette markets in Pakistan, 1987.24 Over time, with productivity gains, the quantity
highlighting changes over time in these markets. of tobacco grown has increased more rapidly than
acreage devoted to tobacco growing. In 2011, over
Tobacco Farming 100,000 tonnes of tobacco were grown in Pakistan, up
almost 50% from a low of just over 69,000 tonnes in
Tobacco has been grown in Pakistan for many
1987 (Graph 3.1).24
years, with Flue Cured Virginia, Burley, and Dark Air
Cured Virginia varieties grown for use in cigarette As shown in Graph 3.2, trade in tobacco leaf both
manufacturing. Light Sun Cured Virginia tobacco is into and out of Pakistan has increased in recent years,
primarily grown for use in water pipes, while Dark Sun but is relatively small in comparison to domestic
Cured Rustica Tobacco is used for naswar. Tobacco is tobacco growing. Pakistan is not a major player in
grown throughout the country, but the majority of global tobacco leaf markets. Exports accounted for
tobacco is grown in the KPK (NWF), which accounts for about 4% of the tobacco grown in Pakistan in 2009,
more than three-fourths of the overall production. Much while imports are just over half that quantity.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 15

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 15

Graph 3.1: Tobacco Agriculture, Pakistan, 1972–2011

Area (Hectares) Production (Tonnes)

70,000 140,000

60,000 120,000

50,000 100,000

Production (Tonnes)
Area (Hectares)

40,000 80,000

30,000 60,000

20,000 40,000

10,000 20,000

0 0
1972 1977 1982 1987 1992 1997 2002 2007

Source: FAOSTAT, 2013

Graph 3.2: Tobacco Leaf Imports and Exports, Pakistan, 1980–2010

Import Quantity Export Quantity

8,000 (tonnes) (tonnes)

7,000

6,000
Quantity (Tonnes)

5,000

4,000

3,000

2,000

1,000

0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Source: FAOSTAT, 2013

Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 16

16 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Between 70,000 and 80,000 people are estimated India, and is an almost wholly owned subsidiary of
to be employed in tobacco growing. Given that over British American Tobacco (BAT). In 2011, PTC
one-third of the more than 43 million-strong labor controlled 55% of the cigarette market in Pakistan.20
force in Pakistan work in the agricultural/fishery PTC sells a variety of brands in each of the three price
sector, tobacco growing accounts for about 0.4–0.5% segments that make up the market, but is strongest in
of the agricultural labor force. the premium and mid-priced segments. PTC's leading
premium brands include John Player Gold Leaf,
Tobacco growing and marketing is controlled by
Benson & Hedges, Dunhill, and Gold Leaf Special. Its
the Pakistani government through the Pakistan
mid-priced brands include Pall Mall, Capstan Filter,
Tobacco Board (PTB), created in 1968. The PTB
and Gold Flake, while Embassy King and Embassy
determines how much tobacco is needed by tobacco
Filter are its key low-priced brands.
product manufacturers and what farmers’ average costs
are for growing tobacco, then uses this information to PMPKL (formerly LTC) has traded places with
set prices for tobacco leaf and quotas for tobacco PTC over the years as the market leader in the
growing. In recent years, however, farmers have Pakistani cigarette market. Lakson Tobacco Company
complained that the PTB, under pressure from tobacco Limited, a long-time family held cigarette producer in
companies, has underestimated the costs of tobacco Pakistan, merged with Premier Tobacco Industries
growing and, as a result, set the tobacco leaf support Limited (controlled by PMI) in 1997 to create the
price too low.25,26 This has led at least some tobacco Lakson Tobacco Company. In 2011, PMPKL controlled
farmers to begin growing other products. While policies 43% of the cigarette market in Pakistan.20 PMPKL is
support tobacco farming, programs that would help strongest in the low-priced market segment, with its
tobacco farmers make the transition to other Morven Gold, L&M, Diplomat, Red & White, and K-2
economically viable alternative livelihoods are lacking. brands. Marlboro is its main premium brand.

There are a number of other smaller domestic

Cigarette Manufacturing
cigarette companies operating in Pakistan, including
Cigarette manufacturing is highly concentrated in Saleem Cigarette Industries Pvt Ltd., Universal Tobacco
Pakistan, as it is in most countries around the world. Company Ltd., Souvenir Tobacco Company Ltd., Barah
The Pakistani cigarette market is dominated by two Tobacco Company, Alfridi Tobacco, and Tatara
firms — Pakistan Tobacco Company Limited (PTC) and Tobacco.9 Reported production by these companies has
Philip Morris Pakistan Limited (PMPKL). PTC was been well below potential production and at least some
established in 1947 from the Imperial Tobacco have been found to be evading taxes by underreporting
Company of India, after the partition of Pakistan and production and/or producing counterfeit cigarettes.9

Table 3.1: Cigarette Company Market Shares, Pakistan, Selected Years, 2000–2011
Company 2000 2002 2004 2006 2008 2009 2011
PTC 41.5% 42.8% 47.6% 42.0% 47.3% 48.5% 55%
LTC/PMPKL 50.7% 51.7% 48.1% 47.6% 42.2% 41.0% 43%
Others 7.8% 5.5% 4.3% 10.4% 10.5% 10.5% 2%
Source: ERC Group, 2009.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 17

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 17

The dominance of PTC and PMPKL is reflected in In 2010, 4% of cigarettes produced in Pakistan were
brand shares in the Pakistani cigarette market, as exported. Most cigarette imports come from Singapore,
shown in Table 3.2. PTC’s top two brands — Capstan by the United States, Malaysia and the Philippines, while
Pall Mall and Gold Flake — account for 43% of the most exports are made to Guinea and Sierra Leone.
market, while PMPKL’s top two brands — Red &
Tobacco products are sold through a variety of
White, king size filter and Morven Gold — account for
channels in Pakistan, with small vendors accounting
37% of the market. Together, the top 4 brands account
for most sales. Almost one-third of cigarettes are sold
for about 80% of cigarette consumption in Pakistan.
by street vendors and another more than one-third by
Virtually all cigarettes produced and sold in convenience stores and news/tobacco stands and
Pakistan are king sized and filter-tipped, and most kiosks.8 The significant presence of these informal
(85.7%) are mid-tar brands.8 Prior to October 2011, distribution channels creates opportunities for tax
less expensive cigarette brands were more often sold in avoidance and evasion, as described below. Most of
packs of 10 or 14, but a ban on sales of packs with fewer remaining sales take place through supermarkets,
than 20 cigarettes was implemented in 2011. The groceries, and non-retail channels.
cigarette market in Pakistan is dominated by two
In Pakistan in 2008/09, about 13% of overall
brands, Morven Gold and Gold Flake in the lower and
employment — 5.6 million persons — was in
mid-priced segments, which also bear some of the
manufacturing. According to company websites,
lowest excise tax levels and rates. Capstan was
PMPKL employs about 2,500 persons in its factories
rebranded in 2010 as Capstan by Pall Mall and
and sales offices, while PTC employs about 1,700 in its
repositioned at a lower price point.
factories. Assuming other cigarette companies employ
Pakistan does modest trade in cigarettes. Imports numbers comparable to their relative market shares,
have grown over time, accounting for nearly 5% of total employment in cigarette manufacturing is likely
consumption by 2010. In contrast, exports have risen a to be less than 5,000, or less than 0.1% of
bit in recent years, after falling steadily in earlier years. manufacturing employment in Pakistan.

Table 3.2: Cigarette Brand Shares, Pakistan, 2012

Brand Company Market Share

Capstan by Pall Mall PTC 23%
Gold Flake PTC 20%
Red & White, KSF PMPKL 20%
Morven Gold PMPKL 17%
Others --- 20%
Source: FBR, Pakistan, 2013

Endnotes for Chapter III

FAOSTAT. Food and Agricultural Organization of the United Nations. 2013. Available at: http://faostat.fao.org/site/291/default.aspx.
24

Accessed February 15, 2013.

BR Research. Tobacco support price: a sign of hope or a disappointment? Business Recorder. December 16, 2011.
25

Gay G. Fuzzy math. Tobacco Reporter. April 2008.

26
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 18

18 | The Economics of Tobacco and Tobacco Taxation in Pakistan

IV. Tobacco Control in Pakistan

More than 20% of Pakistani youth are
In addition to the substantial public health exposed to tobacco smoke at home and
burden caused by tobacco, a strong economic rationale about one-third are exposed in public
exists for government intervention to reduce tobacco
places.
use.10,27 This section reviews the market failures that
provide the economic rationale for government
intervention to reduce tobacco use and describes the
tobacco control environment in Pakistan. attacks, with awareness much lower among less
educated smokers.29
Rationale for Government Intervention
This imperfect information is complicated by the
The notion of consumer sovereignty — the fact that many tobacco users initiate use as youths. As
principle that an individual makes the best choices for noted above, while age of initiation appears somewhat
himself or herself — depends on two key assumptions: later in Pakistan than in many other countries, millions
that an individual fully understands the costs and of Pakistani youth do begin using tobacco by age 15,
benefits of these decisions and that an individual bears with many starting at younger ages. Children and
all of the costs and receives all of the benefits of his or adolescents’ ability to make fully informed,
her decisions. Tobacco use clearly violates both of appropriately forward looking decisions is limited at
these assumptions, resulting in market failures that best, leading governments to intervene with respect to
justify government intervention.10,27 youth in many areas such as driving, drinking alcohol,
and voting. The problems of imperfect information are
In general, consumers have imperfect information
further complicated by the addictive nature of tobacco
about the health and other consequences of tobacco
use, which is poorly understood and underappreciated,
use. Many users do not fully understand the health
particularly among those initiating tobacco use.
hazards associated with tobacco use, and those who do
have a general understanding of the risks do not Finally, there are externalities associated with
adequately internalize these risks.10 This is likely to also tobacco use. Nonusers’ exposure to the smoke
hold true in Pakistan, where many smokers are less generated by tobacco users results in various cancers,
than fully aware of the health consequences of respiratory and cardiovascular diseases, and other
smoking. Data on knowledge about the health diseases.30 More than 20% of Pakistani youth are
consequences of tobacco use are not available for exposed to tobacco smoke at home and about one-third
Pakistan, but data from the Global Adult Tobacco are exposed in public places. Similarly, in Rawalpindi,
Surveys done recently in other parts of South Asia may 56% of adults who do not use tobacco products
be illustrative. In Bangladesh, for example, 92.0% of reported being exposed to tobacco smoke.31
smokers believe smoking causes lung cancer, while Additionally, there can be financial externalities that
only 87% believe smoking causes heart attacks and result from publicly financed health care used to treat
84.2% believe that smoking causes strokes.28 In India, the diseases caused by tobacco use, something that
while 87% of current adult smokers believe that may become more important as Pakistan works to
smoking tobacco causes lung cancer, only 44% believe adopt a publicly funded, universal health insurance
it causes stroke and 57.6% believe it causes heart system.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 19

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 19

Tobacco Control Policy in Pakistan

A variety of tobacco control policies and programs Starting in 2010, Pakistan required a
can be used to address the failures inherent in the graphic warning label on the top 40%
markets for tobacco products. The WHO’s Framework of the front and back of cigarette
Convention on Tobacco Control (FCTC), the world’s packages, with the image used to be
first public health treaty, calls for governments to
rotated annually. Other restrictions on
adopt comprehensive policies to curb tobacco use.
Pakistan signed the WHO FCTC on 18 May, 2004, and tobacco product labeling, including a
ratified less than six months later, on 3 November, ban on the use of misleading
2004, one of the fastest countries to go from signing to descriptors like “light” or “low tar” are
ratifying the treaty. yet to be adopted.
However, several key tobacco control policies in
Pakistan fall short of those called for by WHO in its
Textual warning labels have been required on
guidelines for implementation of various articles of the
cigarette packs and tobacco advertising since 1979,
WHO FCTC.32 Pakistan’s participation in the WHO
under the Cigarettes (Printing of Warning) Ordinance.
FCTC has resulted in some significant advances in
The general nature of this early text warning coupled
tobacco control policy through various Ordinances and
with the country’s high illiteracy rate during this
Statutory Rules and Orders (SROs) but there is still
period made it unlikely that the warning significantly
considerable room for further action. This section
increased awareness of the health risks from smoking
briefly reviews tobacco control policies in Pakistan,
or had a significant impact on smoking rates in
with the exception of tobacco taxation, which is
Pakistan. The warning label ordinance was amended
covered in the next section.
in 2002 to replace the original general statement
In 2002, Pakistan adopted the Prohibition of “warning: smoking is injurious to health” with more
Smoking and Protection of Non-Smokers Health specific health warning that “tobacco causes cancer
Ordinance Number LXXIV (Ordinance LXXIV), and heart diseases”. The warning labels were further
prohibiting smoking in a variety of places, including strengthened by an SRO in 2008 that called for four
health care and educational facilities, government rotating text warnings beginning in July 2009. Most
buildings, restaurants, public transport, indoor recently, a 2010 SRO brought the health warnings
workplaces, and other enclosed public places. However, closer to those recommended in the FCTC Article 11
in September 2008, a controversial SRO was issued that Guidelines. The guidelines call for multiple rotating,
allowed for the creation of designated smoking areas, prominent, graphic warning labels on all tobacco
leading to widespread noncompliance with Ordinance products. Starting in 2010, Pakistan required a
LXXIV. Given the outcry from the public health graphic warning label on the top 40% of the front and
community, in June 2009 Pakistan rolled back the SRO back of cigarette packages, with the image used to be
allowing smoking in designated areas. Enforcement, rotated annually. Other restrictions on tobacco
however, remains weak and compliance is low,32 a product labeling, including a ban on the use of
problem targeted by a 2011 SRO that provide more misleading descriptors like “light” or “low tar” have
guidance on enforcement of the smoke-free policy. not been adopted. Other public education efforts,
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 20

20 | The Economics of Tobacco and Tobacco Taxation in Pakistan

including mass-media campaigns to inform smokers products, including gutka smuggled in from India and
of the risks from smoking, are supported by limited naswar made illegally locally.6
resources.
Pakistan has a national agency for tobacco
Ordinance LXXIV contained some weak control, the Tobacco Control Cell based in the Health
restrictions on tobacco company marketing activities, Services Academy, Cabinet Division, and tobacco
including a ban on tobacco advertising near schools prevention is a national government objective.
and some limits on the time during which television However, the tobacco control agency has limited staff
advertising of tobacco products was allowed. These and resources, with 10 full-time equivalent staff and
restrictions were strengthened by a 2007 SRO that about 5.5 million Rupees (US$61,000) in funding in
further limited the times during which advertising was 2010.26 Cessation support is available, but not widely,
allowed on television (between 3 and 4 a.m.), banned has limited reach and there are no national cessation
billboard advertising, limited other outdoor and point- practice guidelines or models, or a national quitline to
of-sale tobacco ads to one square foot or less, limited support cessation. Cessation pharmacotherapies,
print ads to one square inch or less on inside pages, including nicotine replacement products, bupropion,
and more. While not a comprehensive ban, this has led and varenicline, are available and can be obtained
to a sharp drop in tobacco company advertising. More without a prescription in local pharmacies.32
recently, a 2009 SRO prohibited tobacco companies
Evidence from high-income countries and a
from distributing free samples or offering promotional
growing number of low- and middle-income countries
discounts. Tobacco company sponsorship of events
demonstrates that strong tobacco control policies will
and tobacco product placement in movies and
lead to significant reductions in tobacco use, while
television shows are also prohibited. Despite the
relatively weak policies will have a limited impact at
somewhat comprehensive limits on tobacco company
best.10,33 To date, the adoption, implementation and
marketing, well over half of 13 to 15 year olds surveyed
strengthening of tobacco control policies appears to be
in 2008 reported seeing cigarette ads on billboards or
having some impact on smoking in Pakistan, likely to
in newspapers and magazines.
be contributing to the small downturn in cigarette
Ordinance LXXIV also prohibits the sale of consumption observed in recent years. Stronger, more
tobacco products to youth, and sales of tobacco comprehensive and better enforced policies would help
products near schools have been banned more to accelerate the declines in smoking.
recently.9 However, the numerous small tobacco
In addition, there is an active tobacco control
product vendors, particularly the street vendors and
advocacy movement in Pakistan, led by the Coalition
small kiosks, make it likely that effective enforcement
for Tobacco Control in Pakistan (CTC-Pak). Well over
of the prohibition on sales to minors will be difficult.
one hundred organizations from throughout Pakistan
Given concerns about sharply increasing participate in the coalition. CTC-Pak advocates for the
incidence of oral cancers, bans were imposed on the adoption of strong tobacco control policies consistent
manufacture and sale of smokeless tobacco products. with the FCTC, and monitors the implementation of
However, many Pakistanis continue to use smokeless existing policies.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 21

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 21

Endnotes for Chapter IV

Jha P, Musgrove P, Chaloupka FJ, Yurekli A. The economic rationale for intervention in the tobacco market. In: Jha, P, Chaloupka FJ,
27

eds. Tobacco Control in Developing Countries. Oxford: Oxford University Press. 2000.
Global Tobacco Surveillance System. Global Adult Tobacco Survey (GATS) - Fact Sheet, Bangladesh: 2009. Atlanta GA: U.S.
28

Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National Center for
Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. 2009.
Global Tobacco Surveillance System. Global Adult Tobacco Survey - India Report 2009-10. Deonar, Mumbai, India: International
29

Institute for Population Sciences. 2010.

U.S. Department of Health and Human Services. The Health Consequences of Involuntary Exposure to Tobacco Smoke: A Report of
30

the Surgeon General. Atlanta, Georgia: U.S. Department of Health and Human Services, Public Health Service, Centers for Disease
Control and Prevention, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. 2006.
Alam AY, Iqbal A, Mohamud KB, Laporte RE, Ahmed A, Nishtar S. Investigating socio-economic-demographic determinants of
31

tobacco use in Rawalpindi, Pakistan. BMC Public Health. 2008;8:50.

World Health Organization. WHO Report on the Global Tobacco Epidemic, 2011: Implementing Smoke-Free Environments. Geneva:
32

World Health Organization. 2011.

Jha P, Chaloupka FJ, editors. Tobacco Control in Developing Countries. Oxford: Oxford University Press. 2000.
33
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 22

22 | The Economics of Tobacco and Tobacco Taxation in Pakistan

V. Cigarette Taxes and Prices in final consumer price are used to refer to price inclusive

Pakistan of all taxes (that is, the retail price plus the applicable
VAT).

Tobacco Excise Taxes: Specific and Cigarette taxes in Pakistan: 2003–2013 and
Ad Valorem Changes in 2013
Tobacco taxes that translate into price increases
Cigarette excise taxes in Pakistan have historically
are widely considered the single most effective option
been a complicated mix of both types of excise taxes,
for reducing tobacco use.33–35 Significant increases in
with a specific tax on low-priced brands, an ad
taxes that raise the prices of tobacco products will
valorem tax on high priced brands, and a combined
reduce their consumption, while at the same time
specific and ad valorem tax on mid-priced brands.
generating substantial increases in revenues.
Pakistan for many years defined three price tiers
Of the taxes levied on tobacco products, excise
for locally produced cigarettes, with the defining prices
taxes are the most important since they are levied on
adjusted annually (Table 5.1). A specific excise tax was
particular products and raise prices relative to other
applied to cigarettes in the lowest price tier, an ad
products. There are two basic types of tobacco excise
valorem excise tax was applied to cigarettes in the
taxes — specific excises (taxes that are fixed amounts
highest price tier, and a combination of specific and ad
based on quantity or weight and that are independent
valorem excises was applied to those in the middle
of price) and ad valorem excises (taxes assessed as a
tier. Over time, both the specific tax and ad valorem
percentage of price). Each type of tax has its strengths
rate have been increased.
and weaknesses in terms of tax administration and its
impact on public health and on revenues. Many Changes in excise tax structure in 2013
countries rely on a combination of both excise tax
As Table 5.1 illustrates, Pakistan’s tobacco tax
types.
structure was relatively complex compared to other
countries, with the tax structure changing across price
Structure of Tobacco Taxes in Pakistan tiers from a uniform specific tax, to a mixed specific
Pakistan imposes a variety of taxes on tobacco and ad valorem tax, to a uniform ad valorem tax.
products, including excise taxes on cigarettes, cigars, Tobacco products other than cigarettes are taxed at an
and cigarillos, a tax on the tobacco leaf used in cigarette ad valorem rate of 65% of retail price.
production, duties on imported tobacco products and
tobacco leaf and a value added tax. Excise taxes are the
focus of this analysis.
Pakistan’s tobacco tax structure was
The term retail price in the context of tobacco
complex, with the tax structure changing
taxation in Pakistan is used to denote the price of
across the price tiers from a uniform
products before the addition of value added taxes.
Pakistan applies a VAT of 16% to the retail price of specific tax, to a mixed specific and ad
tobacco products.* In what follows, the term retail valorem tax, to a uniform ad valorem tax.
price will be used as such, while the terms final price or

* In effect, this implies VAT is 13.79% of final consumer price, where final price = retail price + VAT. Additional variation from seller to seller
is not uncommon.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 23

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 23

Table 5.1: Cigarette Tax Rates (Federal Excise Duty) per 10 Cigarettes, Pakistan,
Selected Years, 2003/4–2013/14
Price Range Specific Excise Ad Valorem Excise
(exclusive of VAT)
2004–05
≤ Rs. 5.32 Rs. 2.27 --
> Rs. 5.32, ≤ Rs. 11 Rs. 2.27 69% of price > Rs. 5.32
> Rs. 12 -- 63%
2005–06
≤ Rs. 5.74 Rs. 2.45 --
> Rs. 5.74 ≤ Rs. 13 Rs. 2.45 69% of price > Rs. 5.74
> Rs. 13 -- 63%
2006–07
≤ Rs. 6.17 Rs. 2.63 --
> Rs. 6.17 ≤ Rs. 14 Rs. 2.63 69% of price > Rs. 6.17
> Rs. 14 -- 63%
2007–08
≤ Rs. 6.57 Rs. 2.80 --
> Rs. 6.57 ≤ Rs. 15 Rs. 2.80 69% of price > Rs. 6.57
> Rs. 15 -- 63%
2008–09
≤ Rs. 7.43 Rs. 3.17 --
> Rs. 7.43 ≤ Rs.16 Rs. 3.17 69% of price > Rs. 7.43
> Rs. 16 -- 63%
Feb-09 Ordinance, 14.02.2009
≤ Rs. 8.29 Rs. 3.54 --
> Rs. 8.29 ≤ Rs.17 Rs. 3.54 69% of price > Rs. 8.29
> Rs. 17 -- 63%
2009–10
≤ Rs. 10.00 Rs. 4.75 --
> Rs. 10.00, ≤ Rs. 19.50 Rs. 4.75 70% of price > Rs. 10.00
> Rs. 19.50 -- 64%
2010–11
≤ Rs. 10.00 Rs. 5.25 --
> Rs. 10.00, ≤ Rs. 19.50 Rs. 5.25 70% of price > Rs. 10.00
> Rs. 19.50 -- 65%
2011–12
≤ Rs. 11.50 Rs. 6.04 --
> Rs. 11.50, ≤ Rs. 21 Rs. 6.04 70% of price > Rs. 11.50
> Rs. 21 -- 65%
2012–13
≤ Rs. 13.36 Rs. 7.02 --
> Rs. 13.36, ≤ Rs. 22.80 Rs. 7.02 70% of price > Rs. 13.36
> Rs. 22.80 -- 65%
2013–14
≤ Rs. 22.86 Rs. 8.80 0%
> Rs. 22.86 Rs. 23.25 0%

Note: Prices are based on a pack of 10 cigarettes, excluding VAT.

Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 24

24 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Turkey and a few other countries apply a minimum tax

The Federal Board of Revenue simplified to lower priced cigarette brands, with some variation of
the Excise duty structure in the Budget the tax structures described above applied to higher
2013–14 to remove the ad valorem priced brands.

component and levy only a specific A mixed specific and ad valorem tax structure can
excise duty on cigarettes in Pakistan. potentially combine the strengths of both types of taxes
while limiting their weaknesses. The overall tax will be
less eroded by inflation given the significant ad
In 2013, the Federal Board of Revenue simplified valorem component; however, the specific component
the excise tax structure in the 2013–14 Budget to will need to be regularly increased to keep pace with
remove the ad valorem component and reduced the inflation for the overall tax to retain its real value.
number of tax tiers. The system continues to be tier- Similarly, with a significant uniform specific
based, however it now involves two price tiers with a component, the price gap between premium and lower-
tax of 880 Rupees/1000 sticks on cigarettes with retail priced brands tends to be smaller than it would be
price not exceeding 2286 Rupees/1000 sticks and under a uniform ad valorem tax, which can be
Rupees 2325 per 1000 sticks on cigarettes whose retail advantageous in preventing switching between brands:
price exceeds 2286 Rupees/1000 sticks. when all prices are clustered together and rise together
with taxes, smokers have a greater incentive to quit
Implications of Excise Tax Structures rather than switch to smoking cheaper products. This
however has not been the case with Pakistan’s system —
Pakistan’s non-uniform tax structure is an the price gaps are considerable in Pakistan, and have
instance of a country where excise taxes applied to been amplified by the tax structure over the years.
cigarettes vary based on value, characteristics of the
cigarette or other factors.36 Tax incidence

The tiered tax structure has implications for excise

In the global context, the United States, Australia,
tax incidence, as illustrated in Graph 5.1, both in its
South Africa, and many other countries levy a uniform
previous form, and in its present version.
specific excise tax on all cigarettes. The Philippines,
India, and others apply a tiered tax structure that For the system in place prior to 2013, tiered taxes
imposes differential specific excises that vary based on resulted in three distinct zones in which producers could
manufacturers’ prices, production scale, whether or not choose to price their products. In 2012, the tax per 10
the cigarette is filtered, cigarette length, or other cigarettes was flat up to the threshold of 13.36 Rupees,
factors. Similarly, Vietnam and other countries levy a after which the combination of specific and ad valorem
uniform ad valorem excise tax on all cigarettes, while tax implied that the tax per 10 cigarettes rose until the
Bangladesh and others impose differential ad valorem retail price reached 22.80 Rupees, at which point tax
taxes based on price or other factors. In the European incidence jumped discretely to 65% of price. In terms of
Union and in several other countries, both types of the excise tax as a fraction of price, the uniform specific
excises are applied, with some countries varying the tax applied to low priced brands implied that the tax as
specific tax level and/or ad valorem tax rate based on a share of price fell as retail price increased, up until the
cigarette prices, characteristics or other factors. Egypt, 13.36 Rupees threshold, at which point tax incidence
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 25

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 25

Graph 5.1: Tax per Pack of 10 Cigarettes, Pakistan, 2012–13 and 2013–14, Rupees

25

20
Tax per pack of ten

15

10

5 2013–14
2012–13

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Retail price
Note: Retail price here is price before the addition of VAT. VAT in Pakistan is 16% of retail price, or about 14% of final price.

began to rise slowly up to the 22.80 Rupees threshold, at Price differentials

which point it jumped to 65%. Discrete differences in the With respect to their impact on tobacco product
tax liability created incentives for producers to keep prices, ad valorem taxes tend to result in greater
prices just below the threshold between the middle and differentials in prices between high and low priced
high price tiers or to lower prices on brands that are in products than is the case for a uniform specific tax. This
the top tier in order to reposition them as mid-priced creates more opportunities for users to switch down to
brands. The tiers also increased the differences in cheaper brands in response to tax induced and other
prices between cigarette brands in Pakistan. The very price increases, reducing the impact of tax and price
low market share of premium brands in Pakistan is, in increases on tobacco use. Because of the potential for
large part, the result of this complicated tax structure. substitution to lower priced brands, manufacturers of
premium brands (often multinational tobacco
Graph 5.1 also illustrates the implications of the
companies) generally prefer specific taxes to ad
changes in the excise tax structure in 2013. The tax
valorem taxes that tend to favor low priced brands (that
revenue raised per 10 cigarettes is slightly higher than
are often produced by locally based manufacturers).
in the past for brands with a retail price lower than
15.90 Rupees, and is considerably higher for brands In this respect, Pakistan’s tiered system, where
with prices greater than 22.86 Rupees. For brands with the magnitude of the tax is a function of price results in
retail prices between 16 and 22.86 Rupees, tax larger price differentials between high and low priced
revenues are actually lower per 10 sticks than under brands than would have existed with a uniform specific
the previous system. rate. This creates incentives for smokers to substitute
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 26

26 | The Economics of Tobacco and Tobacco Taxation in Pakistan

are positioned at the price that brings in the most

Pakistan’s tiered system creates revenue per stick to the producers. In contrast, the
incentives for smokers to substitute to price for the middle tier (about 33 Rupees) is at the
cheaper brands rather than quit as taxes mid-point of the price range for this tier, with two rival
brands positioned at the same price point and
and prices rise and/or cigarettes become
occupying the largest share of the market. The prices of
less affordable.
premium cigarettes are clustered at the low end of the
highest tax tier — with the ad valorem tax applicable
for that tier, high priced brands also have to surrender
to cheaper brands rather than quit as taxes and prices
larger revenues per pack as tax. As illustrated in Graph
rise and/or cigarettes become less affordable. In
5.2, the tiered specific and ad valorem tax structure in
addition, this type of tiered tax structure also tends to
Pakistan resulted in significant price gaps between
result in manufacturers’ prices for various brands
brands in different price categories, with low priced
clustering at or near the top of the range of prices in
brands selling for a bit more than half of what
each tier to which taxes are applied.
premium brands sell for, at a minimum. The
Graph 5.2 shows the composition of cigarette final availability of inexpensive cigarettes and the large
consumer prices (inclusive of VAT) for brands in each price gaps between price tiers creates considerable
price tier in 2012. The price of cigarettes for the lowest opportunity for cigarette smokers to substitute down
tier is at the maximum price possible for that tax tier— to cheaper brands in response to tax and price
in effect, with a uniform specific tax, economy brands increases.

Graph 5.2: Price Dispersion and Brand Shares of Cigarettes in Pakistan, 2012

90
Cigarette pack price to consumers,

80
70
post-tax (Rupees)

60 Gold Leaf

50
Capstan
40
30
20
Gold Flake Morven Gold
10
0
Others
Embassy Marlboro, B&H, Dunhill
K2 Red & White Sp
Diplomat
Wills int

Note: the graph depicts cigarette brands in Pakistan in increasing order of price per pack of 20 cigarettes; the width of columns is
proportionate to brand-specific market shares. Consumer price here is calculated as retail price (the term used in Pakistan for pre-VAT,
excise-inclusive price) plus value added tax
Source: Retail prices and brand market shares from FBR, Pakistan.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 27

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 27

Graph 5.3: Cigarette Taxes and Final Consumer Prices, by Price Tier,
Pakistan, 2012–13

VAT
Excise tax
80 Net-of-tax price 60%
Excise tax as % of final consumer price
Rupees per pack of 20 cigarettes

70
50%

Excise tax as % of price

60
40%
50

40 30%

30
20%
20
10%
10

0 0%
Morven Gold Capstan by Pall Mall Gold Leaf

Source: FBR, 2013; the net of tax price and excise tax together constitute retail price. Adding VAT yields the final price
consumers pay for a pack of cigarettes.

final price accounted for by excise taxes rose with

In 2012, cigarette excise taxes in Pakistan price, from just over 42% on popular low priced
accounted for just over half of the final brands to just over 56% of price on high priced
prices. The tiered tax structure implied brands.

that the share of the final price Graph 5.4 replicates the data from Graph 5.3 but
accounted for by excise taxes rose with adds the predicted final consumer prices with the 2013
price, from just over 42% on popular low two-tiered specific tax structure if other elements of
price (including pre-tax price) were unchanged. Since
priced brands to just over 56% of price on
the tax on the lower tier (Rupees 880 per 1000 sticks)
high priced brands. is less than 40% of the tax on the higher tier (Rupees
2325 per 1000 sticks), the large gap in prices between
economy and mid-priced brands as a group versus
On average, cigarette excise taxes in Pakistan higher priced brands is preserved. If — as might be
currently account for just over half of the final prices. recommended as a near to medium term strategy —
Graph 5.3 shows that excise taxes as a percentage of the tax on the lower tier were raised considerably, the
final cigarette prices paid by consumers in 2012–13 prices of those brands would rise.
were well below the levels recommended by the WHO,
Real price trends over time
which recommends that cigarette excise taxes should
account for at least 70% of the final price for cigarettes. With ad valorem excises, the tax per unit rises
The tiered tax structure implied that the share of the with prices so that the tax and the revenues it
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 28

28 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Graph 5.4: Cigarette Taxes and Final Consumer Prices, by Price Tier, Pakistan,
2012–13 versus Predicted 2013–2014 Prices

VAT
Excise tax per 20 pieces
90 Price exclusive of all tax 20 pieces
80
70
60
50

40
30

20
10
0
Morven Morven Capstan Capstan Gold Leaf Gold Leaf
Gold Gold by Pall Mall by Pall Mall 2013 predicted
2013 predicted 2013 predicted

Note: Source for 2012 prices: FBR, 2013; the net of tax price and excise tax together constitute retail price. Adding VAT yields the final price
consumers pay for a pack of cigarettes. 2013 prices are computed assuming unchanged pre-tax prices and a new excise structure following the
2013 budget.

time. While the excise tax rates and the values that
While the excise tax rates and
define the price tiers have been increased periodically,
the values that define the price these increases have not always kept pace with
tiers have been increased inflation. As a result, the inflation-adjusted price of
periodically, these increases cigarettes fell sharply in the 1990s and again in the
mid-2000s, while rising when effective tax rates were
have not always kept pace with
increased starting in 2001 and again in recent years,
inflation.
particularly since 2009–10. The decline in real prices
in the 1990s and mid-2000s appear to be a particularly
important factor in explaining the rise in per capita
cigarette consumption over these periods.
generates are more likely to keep pace with inflation, in
Infrequent and small increases in the tax rates,
contrast to specific taxes where the real value of the tax
coupled with the modest increases in the price ranges
and resulting revenues will fall with inflation unless
for the price tiers have led to declining real cigarette
regularly adjusted upward. Specific taxes require
prices in Pakistan over some years. Some countries
regular increases to keep pace with inflation.
have addressed the problem of inflation eroding the
Graph 5.5 illustrates an additional consequence value of a specific tobacco tax by creating mechanisms
for tobacco control of Pakistan’s cigarette taxes over for annual or other administrative adjustments to
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 29

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 29

Graph 5.5: Inflation Adjusted Cigarette Prices and Per Capita Cigarette
Consumption in Pakistan, 1990–2010

Real price Per capita consumption

(2010 Rupees)
130 430
410
120
390
110 370

Cigarettes per capita

Real price (2010 Rupees)

100 350
330
90
310

80 290
270
70
250
60 230
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Sources: Consumption - Euromonitor International, 2011 (1997-2010) and ERC Group, 2009 (1990-1996); Price - Economist Intelligence Unit, 2011;
CPI - World Bank, 2011; and authors' calculations.
Note: Price is the average price reported by EIU for a pack of 20 local brand cigarettes in supermarkets and mid-priced stores.

specific tax rates that maintain the real value of the tax increasing affordability of cigarettes in the mid/late-
over time. 1990s is a key factor in the rise in per capita cigarette
consumption during this period. More recently,
Cigarette Affordability declining real incomes coupled with rising real prices
The relationship between prices, income, and have reduced the affordability of cigarettes,
cigarette consumption in Pakistan is clearer when one contributing to significant reductions in per capita
considers the affordability of cigarettes, measured by consumption over the past several years.
the ratio of average cigarette pack price to per capita
Cigarette Taxes and Prices – Regional
income, as illustrated in Graph 5.6. Though real
Comparison
cigarette prices in Pakistan fell in the early 1990s,
cigarettes actually became less affordable because real Compared to other countries in both the WHO
incomes were falling more rapidly. Real incomes rose Eastern Mediterranean region that it is grouped in, as
rapidly after 1995 while real prices continued to also the WHO South East Asia region where similar
decline. This led to cigarettes becoming much more tobacco products are pervasive, cigarette taxes in
affordable. The reduction in affordability in the early Pakistan are at the higher end of the range, in terms of
1990s contributed to the declines in per capita the percentage of the final consumer price of the most
cigarette consumption during this period. Similarly, sold brand of cigarettes accounted for by taxes (Graph
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 30

30 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Graph 5.6: Cigarette Affordability and Per Capita Cigarette Sales, Pakistan, 1990–2010

Affordability Consumption
Index (1990 = 1) (cigarettes per capita)
1.2 500
450

Consumption (cigarettes per capita)

1.0
Affordability Index (1990 = 1)

400
350
0.8
300

0.6 250
200
0.4
150
100
0.2
50

0.0 0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Sources: Consumption - Euromonitor International, 2011 (1997–2010) and ERC Group, 2009 (1990–1996); Price - Economist Intelligence Unit,
2011; Income - World Bank, 2011; and authors' calculations.
Notes: The affordability index is calculated by dividing average pack price for cigarettes in local currency units by the average GDP per
capita. The average price used is the average price reported by EIU for a pack of 20 local brand cigarettes in supermarkets and mid-priced
stores. A falling index reflects the fact that cigarette pack prices have risen much more slowly than GDP per capita.

complicated tiered cigarette tax structure makes the

With respect to tax administration, price gap between brands larger in Pakistan than in
uniform specific excise taxes tend many other countries, contributing to the most
to be easier to administer than popular brand being among the cheapest brands.

ad valorem excises given that Revenue considerations

they are based on quantity In terms of revenues, tobacco tax revenues will be
rather than value. more stable and predictable with a specific tax than
with an ad valorem tax. With an ad valorem tax, the
amount of the tax varies with industry prices, implying
that the industry can reduce the revenue and public
5.7).37 However, very low industry prices and the health impact of a tax increase by lowering its prices in
resulting low absolute tax that results from the tiered response. In addition, any industry price cut will result
tax structure rate make cigarette prices in Pakistan in a reduction in the tax liability per unit sold, leading
among the lowest in both the Eastern Mediterranean to a larger price reduction than accounted for by the
and the South-East Asian regions (Graph 5.8), as well industry price cut alone. A tiered system can exacerbate
as among the lowest in the world.37 Moreover, the this problem if producers reposition brands from
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 31

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 31

Graph 5.7: Pakistan in Comparison to WHO Eastern Mediterranean and South-East

Asia Regions: Share of Total and Excise Taxes in the Price of a Pack of the Most Sold
Brand of Cigarettes, 2012

West Bank and Gaza Strip1

Tunisia
Jordan
Sri Lanka
Egypt
Sudan
Bangladesh
Thailand
Morocco
Pakistan
Syrian Arab Republic
Yemen
Indonesia
Myanmar
Maldives
Lebanon
% excise tax
India
Nepal % all other taxes
Timor-Leste
Djibouti
United Arab Emirates
Kuwait
Saudi Arabia
Qatar
Oman
Bahrain
Iran (Islamic Republic of)
Libya
Somalia
Iraq
Afghanistan

0 10 20 30 40 50 60 70 80 90

Source: WHO, 2013.

Notes:
Data not reported/not available for: Morocco.
1 Data apply only to West Bank.
Data not reported/not available for: Democratic People's Republic of Korea.
It is illegal to sell cigarettes in Bhutan.
SEARO countries depicted in shades of grey

higher tax/price tiers to lower price tiers, reducing the opportunity to avoid paying taxes when the taxes are
effective tax on the repositioned brands. based on ex-factory prices. For example, firms can
reduce their tax liability by setting an artificially low
With respect to tax administration, uniform
price at which they sell to their own distributors who
specific excise taxes tend to be easier to administer
then raise prices significantly before selling to
than ad valorem or tiered specific excises given that
wholesalers and/or retailers. This problem of
they are based on quantity rather than value. With ad
undervaluation could be entirely avoided by the
valorem or tiered specific excises, firms have a greater
application of a uniform specific tax.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 32

32 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Graph 5.8: Pakistan in Comparison to WHO Eastern Mediterranean and South-East

Asia Regions: Prices of Pack* of Most Sold and Cheapest Brands of Cigarettes in
International Dollars, 2012

Sri Lanka
India
Morocco
Maldives
Sudan
Tunisia
Thailand
Timor-Leste
Bahrain
Lebanon
Saudi Arabia
Oman
Qatar
Indonesia
Egypt Cheapest brand
Djibouti Most sold brand
Kuwait
Iran (Islamic Republic of)
Jordan
Yemen
Myanmar
Bangladesh
United Arab Emirates
Nepal
Libya
Pakistan $0.81
Afghanistan
Iraq

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00

Source: WHO, 2013.

Notes:
PPP not available for: Somalia and West Bank and Gaza Strip.
Data not reported/not available for: Democratic People's Republic of Korea.
It is illegal to sell cigarettes in Bhutan.
SEARO countries depicted in shades of grey.
* 20 pieces

Endnotes for Chapter V

Jha P, Chaloupka FJ. Curbing the Epidemic: Governments and the Economics of Tobacco Control. Washington, D.C.: International
34

Bank for Reconstruction and Development/World Bank. 1999.

International Agency for Research on Cancer. Effectiveness of Tax and Price Policies for Tobacco Control: IARC Handbook of Cancer
35

Prevention, Volume 14. Lyon, France: International Agency for Research on Cancer. 2011.
World Health Organization. WHO Technical Manual on Tobacco Tax Administration. Geneva: World Health Organization. 2010.
36

World Health Organization. WHO Report on the Global Tobacco Epidemic, 2013: Enforcing bans on tobacco advertising, promotion
37

and sponsorship. Geneva: World Health Organization. 2013.

Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 33

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 33

VI. The Demand for Cigarettes in Over the past decade, a growing number of studies

Pakistan has examined the impact of taxes and prices on

tobacco use in low- and middle-income countries.
Considerable empirical evidence from high- These studies have estimated a wide range of price
income countries and growing evidence from low- and elasticities, with some, but not all, indicating that
middle-income countries demonstrates that higher demand for tobacco products is more responsive to
tobacco product taxes and prices lead to reductions in price in low- and middle-income countries than it is in
tobacco use.33–35 These result from increased cessation, high-income countries. For example, Hu and Mao
fewer former users restarting, lower rates of initiation, (2002) estimate that the price elasticity of cigarette
and reductions in consumption among continuing demand in China ranges from –0.50 to –0.64, while
users. This section briefly reviews existing global Karki and colleagues (2003) estimate an overall price
evidence, with an emphasis on studies from low- and elasticity of cigarette demand of –0.88 in Nepal.38, 39 As
middle-income countries, particularly South Asia, as in studies for high-income countries, studies from low-
well as the limited existing evidence for Pakistan. This and middle-income countries that account for the
is followed by new estimates of the impact of price and addictive nature of tobacco use find that demand
income on cigarette demand in Pakistan. responds more to price in the long run. For example,
Aloui (2003) estimates short run price elasticities for
Global Evidence tobacco use in Morocco in the range from –0.51
to –0.73, and estimates long run elasticities that range
Many studies have employed aggregate data to
from –1.36 to –1.54.40
examine the impact of cigarette and other tobacco
product taxes and prices on overall tobacco use.35 Findings from studies based on individual-level
Before 2000, nearly all of these studies came from survey data on adult tobacco use indicate that taxes
high-income countries including the United States, and prices influence both tobacco use decisions
Canada, the United Kingdom, Australia, and several (prevalence) and the frequency and amount of tobacco
others. These studies consistently find that increases consumption. In general, the estimates from high-
in taxes and prices on tobacco products lead to income countries suggest that about half of the impact
reductions in tobacco use. Most studies have focused of price on tobacco use results from its effect on
on cigarette smoking, given that cigarettes account for prevalence. Given that relatively little initiation occurs
nearly all the tobacco use in high-income countries. during adulthood, these changes largely result from
While these studies have produced a wide range of cessation among adult users. This is confirmed by a
estimates of the magnitude of the effects of price on small number of studies which find that increases in
overall cigarette consumption, the vast majority of prices lead a number of current users to try to quit,
these studies estimate price elasticities in the range with some successful in doing so in the long run.
from –0.25 to –0.5, with most of these clustered Studies using survey data from low- and middle-
around –0.4, suggesting that a 10% increase in income countries similarly find that price affects
cigarette prices will, on average, bring about a 4% prevalence, although the relative impact on prevalence
reduction in consumption. Models that account for the and consumption varies considerably across studies
addictive nature of tobacco use find that demand is and countries. For example, Adioetomo and colleagues
more responsive to price in the long run than it is in (2005) find no impact of price on the prevalence of
the short run. smoking in Indonesia, while at the same time
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 34

34 | The Economics of Tobacco and Tobacco Taxation in Pakistan

estimating an elasticity for conditional cigarette response to an increase in the relative price of
demand (changes in consumption of cigarettes by cigarettes.45 This potential for substitution highlights
current smokers) of –0.62.41 In contrast, Kyaing (2003) the importance of increasing taxes and prices for all
estimates a prevalence price elasticity of –1.28 and a tobacco products if the public health benefits of higher
conditional demand elasticity of –0.34 in Myanmar.42 prices are one of the motives for tobacco tax increases.

Several studies based on survey data have

examined the differential responses of various Tobacco Demand in South Asia
population subgroups to changes in the prices for
India and Bangladesh are countries whose
tobacco products, including those based on age,
tobacco markets have many similarities with and
gender, income, education, race/ethnicity, and
whose histories are tied to Pakistan’s. Prevalence of
location (urban vs. rural). Findings for gender,
smoking tobacco is high among men and low among
race/ethnicity and location vary across countries,
women, many smokers smoke products other than
while consistent patterns are more evident with
manufactured cigarettes, and both men and women
respect to age and socioeconomic status (as measured
consume a variety of smokeless tobacco products.
by income and/or education). In general, most studies
Their tobacco tax structures are complex, with tiered
for different age groups find that tobacco use among
taxes leading to large price differences among cigarette
younger persons is more responsive to price than is
brands and to significant differences between different
tobacco use among older persons. Similarly, as
tobacco products. Given these commonalities, the
predicted by economic theory, sub-populations
emerging evidence on the demand for tobacco
registering a lower socioeconomic status are more
products in India and Bangladesh may be of particular
responsive to price than are sub-populations with a
interest for understanding the demand for tobacco
higher socioeconomic status. For example, Sayginsoy
products in Pakistan.
and colleagues (2002) estimate cigarette demand
elasticities of –1.33, –1 and –0.52 for low, middle and John (2008) used household data from the
high-income populations in Bulgaria.43 Similarly, van 1999/2000 National Sample Survey (NSS) of India to
Walbeek (2002) estimates elasticities by income estimate the price elasticity of demand for tobacco
quartile ranging from –1.39 for the lowest quartile products in India.46 Using an estimation strategy
to –0.81 for the highest quartile in South Africa.44 developed by Deaton (1988) that accounts for spatial
and quality-based differences in prices, John
Finally, several studies examine the potential for
estimated the own- and cross-price elasticities for
substitution among tobacco products in response to
cigarettes, bidis, and leaf tobacco.47 He estimated
changes in the relative prices of these products. In
significant, negative own-price effects, with estimated
general, these studies find that part of the reduction in
price elasticities of –0.35, –0.91, and –0.88 for
the use of one tobacco product in response to an
cigarettes, bidis, and leaf tobacco, respectively. In
increase in its price will be offset by increased use of
general, John found weak evidence of cross-price
other products if the prices of these products are not
effects that suggested that cigarettes and bidis may be
also increased. For example, Laxminarayan and
economic complements.
Deolalikar (2004) find that changes in relative prices
for cigarettes and rustic tobacco in Vietnam will lead to More recently, Guindon and colleagues (2011)
substitution between the two, particularly for updated and extended John’s (2008) analysis in their
substitution from cigarettes to rustic tobacco in analysis of data from ten rounds of the NSS conducted
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 35

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 35

between 1993/94 and 2007/08.48 Using a modified larger study that also estimated demand in Indonesia,
version of John’s empirical approach, they obtained Nepal, Sri Lanka, Thailand, Maldives, and Myanmar.50
similar price elasticity estimates for bidis, in the range Using annual time series data from 1970 through
from –0.5 to –1.0. In contrast to John who found that 2000, they too estimated a relatively parsimonious
cigarette demand was much less responsive to price model that included only price and income as
than was bidi demand, Guindon and colleagues determinants of demand. In addition to estimating a
concluded that cigarette and bidi demand were both conventional demand model, they also estimated a
similarly responsive to price. In specifications that myopic addiction model. Like Ali and colleagues, they
pooled 7 waves of the NSS from 1990/00 through found no significant effect of prices on cigarette
2007/08, they estimated a price elasticity of bidi demand in either model. In their country-specific
demand of –0.94 and a price elasticity of cigarette models for the other countries they examined, the
demand of –1.03. They found limited evidence of socio- generally found negative and often significant price
economic differences in price responsiveness, with effects, with short-run price elasticity estimates for
estimates indicating that lower-SES groups were cigarette demand clustered around –0.5 and long-run
somewhat more responsive to price than higher-SES elasticity estimates clustered around –0.7. In addition
groups. For example, based on expenditure quintiles to the country-specific estimates, they also estimated
and using data on all households, they estimated demand models using pooled data from the seven
cigarette and bidi price elasticities of –0.95 and –1.12 countries. Price elasticity estimates from their
for households in the lowest three quintiles, compared conventional demand models ranged from –0.6
to elasticities of –0.86 and –0.99 for those in the to –0.9, while long-run elasticities from their myopic
highest two quintiles. They also find some evidence of addition models ranged from –0.8 to –1.40.
cross-price effects for bidis and cigarettes, with
More recently, Nargis and colleagues (2010, 2011)
differences based on household characteristics.
have used the individual level data from the ITC-
Specifically, they find that rural and low-SES
Bangladesh survey to estimate the price elasticity of
households may substitute bidis and cigarettes when
cigarette and bidi demand in Bangladesh. Given the
the price of one increases relative to the other, while the
low prevalence rates of cigarette smoking among
two may be complements for higher-SES households.
women, cigarette demand models were estimated for
adult males only; bidi demand models were estimated
To date, a few studies have estimated the price
for both men and women.51, 52 In addition to price and
elasticity of demand for tobacco products in
income, Nargis and colleagues controlled for a variety
Bangladesh. Ali and colleagues (2003) were the first to
of other factors in their demand models, including age,
estimate tobacco demand for Bangladesh using annual
marital status, educational attainment, employment
time series data from 1983 through 1999 to estimate a
status, household size, urban/rural location, the
relatively parsimonious model that included prices and
number of years since initiation, and survey year (in
per capita GDP as the only explanatory variables.49
They obtained a negative but insignificant price the 2011 analysis that used both the 2009 and 2010
elasticity of –0.27, and a positive and significant survey data). Nargis and colleagues estimate
income elasticity of 0.62. significant negative effects of cigarette prices on both
cigarette smoking prevalence and on cigarette
Soon after, Guindon and colleagues (2003) consumption among smokers, with the effects on
estimated cigarette demand for Bangladesh as part of a prevalence about twice those of the effects on
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 36

36 | The Economics of Tobacco and Tobacco Taxation in Pakistan

conditional demand. Their overall cigarette price production plus imports minus exports) from 1981
elasticities range from –0.43 to –0.66, somewhat less through 2009, Mushtaq and colleagues estimated
inelastic estimates than the range estimated in studies cigarette demand as a function of price and income.
from high-income countries and well within the range Their price measure reflected the price of a low-priced
estimated in studies from low- and middle-income brand of cigarettes given that these brands account for
countries. In contrast, estimates for bidi demand are the majority of cigarette consumed in Pakistan during
either statistically insignificant or weakly significant the period covered by their data. Given the
and no clear pattern emerges for the relative impact of nonstationarity of their data, they used co integration
price on prevalence versus conditional demand. methods* and employed a myopic addiction model.✝
Estimates based on the 2009 data alone suggest that They found that both price and income had a
higher bidi prices are associated with reduced significant negative impact on cigarette demand. Given
prevalence of bidi smoking, while those for 2009 and these estimates, Mushtaq and colleagues concluded
2010 combined show no effect of bidi prices on bidi that demand was price inelastic in the short run, with
smoking prevalence, with the opposite found for an elasticity of –0.48, but was much more responsive
conditional demand. Nargis and colleagues interpret to price in the long run, with an elasticity of –1.17.
the relatively inelastic estimates obtained for bidi Short run income elasticity was estimated to be –0.34,
demand to the very low prices for bidis which make with an estimated long run income elasticity of –0.84.
them highly affordable. In their analysis of the pooled They hypothesized that the negative impact of income
2009/10 ITC-Bangladesh data, Nargis and colleagues was picking up the increased education and awareness
also estimate price elasticity for subgroups based on of the harms caused by smoking as income rose and
socioeconomic status. Consistent with Guidon and that this increased knowledge led to reductions in
colleagues (2011) estimates for India, they find some smoking in Pakistan during this period.
evidence that cigarette smoking lower socioeconomic
groups is somewhat more sensitive to price, with Cigarette Demand in Pakistan — New
overall elasticities of –0.76 and –0.59 for the lowest Estimates
and highest tertiles, respectively.52 No clear patterns
Using annual time series data on aggregate
emerge for bidis, given the mostly statistically
cigarette consumption from 1990/91 through
insignificant estimates.
2007/08, we estimate a relatively simple model of
cigarette demand in Pakistan. Given available data, our
Cigarette Demand in Pakistan — Existing
model is similarly parsimonious and includes only real
Evidence
price and real income as determinants of per capita
To date, only one published study has examined cigarette demand. Cigarette price is found to have a
the demand for tobacco products in Pakistan.53 Using negative and statistically significant impact on
annual data on net cigarette production (domestic cigarette demand in Pakistan, with an estimated price

* Nonstationarity is a feature of time series data that arises when a variable’s average value changes over time. When economic
variables like price and quantity have trends, regressions to estimate the effect of price on quantity can result in biased estimates
(due to spurious correlation of variables that trend over time). Cointegreation is a statistical technique that corrects for such spurious
correlation.
✝ The myopic addiction approach, frequently used in the estimation of demand for products like cigarettes, recognizes the addictive
nature of certain commodities—in effect, since consumers tend to overweight the present benefits they derive from smoking over the
longer term harms, price increases tend to lead to smaller reductions in demand in the short run that they do in the long run.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 37

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 37

most low- and middle-income countries, income is

Between 1990 and 2006 general trends of found to have a positive and statistically significant
falling real (i.e. inflation-adjusted) impact, with an estimated income elasticity of 0.78.
cigarette prices and increasingly Together, the estimates imply that the past two
affordable cigarettes led to significant decades’ general trends of falling real prices and
increasingly affordable cigarettes led to significant
increases in cigarette smoking in Pakistan.
increases in cigarette smoking in Pakistan, while the
more recent combination of higher taxes and
elasticity of –0.58. In contrast to Mushtaq and increasingly less affordable cigarettes accounts for the
colleagues, and more consistent with estimates from sharp reductions in smoking over the past few years.

Endnotes for Chapter VI

Hu TW, Mao Z. Effects of cigarette tax on cigarette consumption and the Chinese economy. Tobacco control. 2002;11(2):105–8.
38

Karki YB, Pant KD, Pande BT. A Study on the Economics of Tobacco in Nepal. HNP Discussion Paper. Washington DC: The World Bank.
39

2003.
Aloui O. Analysis of the Economics of Tobacco in Morocco. HNP Discussion Paper. Washington DC: The World Bank. 2003.
40

Adioetomo SM, Djutaharta T, Hendratno. Cigarette Consumption, Taxation And Household Income: Indonesia Case Study. HNP
41

Discussion Paper. Washington DC: The World Bank. 2005.

Kyaing NN. Tobacco Economics in Myanmar. HNP Discussion Paper. Washington DC: The World Bank. 2003.
42

Sayginsoy O, Yurekli A, de Beyer J. Cigarette Demand, Taxation, and the Poor: A Case Study of Bulgaria. HNP Discussion Paper.
43

Washington DC: The World Bank. 2002.

Van Walbeek CP. The distributional impact of changes in tobacco prices. The South African Journal of Economics. 2002;70(3):258-267.
44

Laxminarayan R, Deolalikar A. Tobacco initiation, cessation, and change: evidence from Vietnam. Health Economics. 2004;13:1191-
45

1201.
John RM. Price elasticity estimates for tobacco products in India. Health Policy and Planning. 2008;23:200-209.
46

Deaton AS. Quantity, quality, and spatial variation of price. American Economic Review. 1988;78:418-430.
47

Guindon GE, Nandi A, Chaloupka FJ, Jha P. Socioeconomic Differences in the Impact of Smoking Tobacco and Alcohol Prices on
48

Smoking in India. National Bureau of Economic Research Working Paper Number 17580. Cambridge, Massachusetts: National Bureau
of Economic Research. 2011.
Ali Z, Rahman A, Rahaman T. An Economic Analysis of Tobacco Control in Bangladesh. HNP Discussion Paper. Washington DC: The
49

World Bank. 2003.

Guindon GE, Perucic AM, Boisclair D. Higher Tobacco Prices and Taxes in South-East Asia: An Effective Tool to Reduce Tobacco Use,
50

Save Lives, and Generate Revenue. HNP Discussion Paper. Washington DC: The World Bank. 2003.
Nargis N, Ruthbah UH, Fong GT. Taxation of Tobacco Products in Bangladesh: Findings from the 2009 ITC Bangladesh Survey. ITC
51

Project Working Paper Series. Waterloo, Ontario, Canada: University of Waterloo. 2010.
Nargis N, Ruthbah UH, Hussain AKMG, Ashiquzzaman SM, Fong GT, Huq I. Pricing and Taxation of Tobacco Products in Bangladesh:
52

Findings from Wave 1 (2009) and Wave 2 (2010) of the ITC Bangladesh Survey. ITC Project Working Paper Series. Waterloo, Ontario,
Canada: University of Waterloo. 2011.
Mushtaq N, Mushtaq S, Beebe L. Economics of tobacco control in Pakistan: Estimating elasticities of cigarette demand. Tobacco
53

Control 2011;20:431-435.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 38

38 | The Economics of Tobacco and Tobacco Taxation in Pakistan

VII. Impact of Cigarette and Tax

(In the first modeled scenario) a
Increases in Pakistan
uniform specific cigarette excise tax
Using the price elasticity estimates described of 31.2 Rupees (US$0.32) per pack of
above, we simulate the effects of cigarette tax increases 20 cigarettes raises the percentage
on several outcomes related to cigarette smoking in
of average final cigarette prices
Pakistan, including overall cigarette consumption,
accounted for by tax to 70%.
government tax revenues, the number of current and
future smokers, and deaths caused by smoking. In
these analyses, all other factors, most notably per
capita income, are being held constant. To the extent
that income is rising, the tax increases will generate
Impact of Tax Increases on Cigarette
smaller reductions in tobacco use, but larger increases
Consumption and Tax Revenues
in revenues than predicted, given that increases in
income result in greater cigarette consumption. For the baseline we assume that the average price
of cigarettes of a pack of 20 cigarettes in 2013 is 38.7
The tax scenarios modeled are uniform specific
Rupees (US$0.40) per pack, based on averages of
excise taxes, a departure, both from the mixed system
prices within price tiers and the share of the market
in place through 2013, and the two-tiered specific
accounted for by each tier; that, on average, cigarette
system in place since the 2013 budget. In addition to
excise taxes are 67.5% of total final price inclusive of
being analytically easier to model, uniform specific
all taxes (26.2 Rupees or US$0.27 per pack);* and that
taxes have the advantage of reducing gaps in prices
total tax-paid cigarette sales were just over 3.2 billion
across segments and reducing the incentive to
packs of 20 cigarettes per year. At these values, total
manufacture cheap cigarettes and sustain a large
cigarette excise tax revenues were estimated to be
economy segment. From a revenue perspective, this
almost 85 billion Rupees (US$862 million). Our first
has the effect of raising additional revenues from the
analysis simulates the impact of replacing the current
economy and medium tiers that currently account for a
tiered cigarette excise tax structure with a uniform
smaller share of total revenues. From a public health
specific cigarette excise tax of 31.2 Rupees (US$0.32)
perspective, the reduction in price gaps across
per pack of 20 cigarettes, raising the percentage of
segments is important to reducing substitution
average final cigarette prices accounted for by tax to
possibilities and encouraging effective quits by current
70%, in accordance with WHO recommendations.30
smokers when taxes are raised.
We estimate that this tax increase will raise average
Finally, we discuss other impacts of tax increases, final prices paid by consumers to 44.6 Rupees
including their effects on the poor, illicit trade, and (US$0.45) per pack — just over a 15% increase in
employment in Pakistan. price.

* Tax rates listed in Table 5.1 are per 10 sticks. The 2013-14 rates per 20 sticks are Rupees 17.60 and Rupees 46.50 respectively for
cigarettes with retail prices less than and greater than Rupees 45.72 per 20 sticks.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 39

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 39

(In the second modeled scenario) Taxing all brands at 44 Rupees per
the current tiered cigarette excise tax pack would cut cigarette sales by
structure is replaced by a uniform more than 26% while increasing
specific cigarette excise tax of 44 revenues by about 39.5 billion Rupees
Rupees (US$0.45), the highest excise (US$403 million)
tax that was applied in 2012 to a above the baseline.
pack of 20 cigarettes in Pakistan.
This tax would raise the share Rupees (US$277 million). We estimate that taxing all
of excise tax in average cigarette brands at 44 Rupees per pack would cut cigarette sales
price to 74%. by more than 26% while increasing revenues by about
39.5 billion Rupees (US$403 million) above the
baseline. These estimates, as well as estimates based
on the range of elasticities described in this report are
Our second analysis simulates the impact of
presented in Table 7.1.
replacing the current tiered cigarette excise tax
structure with a uniform specific cigarette excise tax of
Impact of Tax Increases on Public Health
44 Rupees (US$0.45), the highest excise tax that was
applied in 2012 to a pack of 20 cigarettes in Pakistan. In addition to estimating the impact on smoking
This tax would raise the percentage of average cigarette and tax revenues, we simulate the impact of the two tax
prices accounted for by the excise tax to 74%. At this increases described above on the number of smokers
tax level, the average final price, inclusive of all taxes, and on future deaths caused by smoking among the
would rise to 59.4 Rupees (US$0.61), an over 53% current population cohort in Pakistan. Estimates based
increase in average cigarette prices over the baseline. on the range of elasticities described in this report are
also presented in Table 7.1. Given current population
At the midpoint of the elasticity range (–0.41
and smoking prevalence estimates, just over 14 million
to –0.58) obtained from the estimates described above
persons ages 18 and older in Pakistan are smokers in
(–0.495), we estimate that a uniform specific tax
the baseline scenario. Estimates indicate that more
accounting for 70% of the average cigarette price will
than one in two lifetime smokers will die prematurely
reduce overall cigarette sales by 7.5%, while at the
from diseases caused by cigarette smoking.54 Given this
same time generating substantial new revenues. At the
evidence, we assume that half of long-term smokers will
new, lower level of consumption, we estimate that
die prematurely as a result of their addiction. With
cigarette tax revenues would increase by 27.2 billion
these assumptions, we estimate that just over 7 million
adults in the current population cohort will die
A tobacco tax accounting for 70% of the prematurely from a disease caused by smoking.
average cigarette price will reduce Assuming that the current cohort of youth in Pakistan
overall cigarette sales by 7.5%, raise will take up smoking at the same rates as in the current
adult cohort, we estimate that almost 9.7 million youth
cigarette tax revenues by 27.2 billion
ages 0 through 17 will become smokers as adults and
Rupees (US$277 million). that over 4.8 million of them will die prematurely from
diseases caused by smoking.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 40

40 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Table 7.1: The Impact of Increasing Cigarette Excise Taxes on Smoking, Smoking-Attributable
Mortality and Government Revenue

Model parameters, baseline

Current smokers (millions) 14.0
Premature deaths in current smokers (millions) 7.0
Expected future smokers (millions) 9.7
Premature deaths in future smokers (millions) 4.8
Average cigarette excise tax 26.2
Average cigarette price 38.7
Excise tax as a percentage of price 67.5%
Model projections
Increased average cigarette tax 31.2 44.0
Increased average cigarette pack price 44.6 59.4
Cigarette excise tax as a percentage of price 70.0% 74.0%
Alternative elasticity assumptions –0.41 –0.495 –0.58 –0.41 –0.495 –0.58
Reduction in number of current
smokers (millions) 0.43 0.52 0.61 1.53 1.85 2.17
Percentage reduction in numbers of smokers 3.1% 3.7% 4.4% 10.9% 13.2% 15.5%
Reduction in premature deaths
caused by smoking among current
smokers (millions) 0.15 0.18 0.21 0.54 0.65 0.76
Percentage of premature deaths
in current smokers averted by
higher taxes 2.2% 2.6% 3.1% 7.7% 9.2% 10.8%
Reduction in number of future
smokers (millions) 0.60 0.72 0.85 2.12 2.55 2.99
Reduction in premature deaths
caused by smoking among
future smokers (Millions) 0.30 0.36 0.42 1.06 1.28 1.50
Percentage of premature deaths in
future smokers averted by higher taxes 6.2% 7.5% 8.8% 21.9% 26.4% 31.0%
Total reduction in number of
smokers (millions) 1.03 1.25 1.46 3.65 4.40 5.16
Total reduction in premature deaths
caused by smoking (millions) 0.45 0.55 0.64 1.59 1.92 2.25
Percentage of premature deaths in
current and future smokers averted
by higher taxes 3.8% 4.6% 5.4% 13.5% 16.3% 19.1%
Additional Excise Tax Revenues (PKR billions) 28.7 27.2 25.6 47.2 39.5 31.9
Additional Excise Tax Revenues (US$ millions) 292.7 276.9 261.1 480.9 402.9 325.0
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 41

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 41

Global evidence suggests that about half of the

impact of price on overall smoking among adults results A uniform specific excise tax
from a reduction in smoking prevalence.37 Given this, accounting for 70% of cigarette prices,
we estimate that the average prevalence elasticity on average, will reduce youth smoking
implied by the estimates described in this report
prevalence by about 7%, preventing
is –0.25. Based on this estimate, the price increase
resulting from replacing the current tax system with a almost 725,000 Pakistani youth from
uniform specific cigarette excise tax that accounts for taking up smoking.
70% of average final cigarette prices will reduce adult
smoking prevalence by over 3.7%, amounting to a Increasing the tax by taxing all
reduction of over half a million adult smokers. Taxing cigarette brands at 44 Rupees
all cigarettes at 44 Rupees per pack, an increase in the per pack would reduce youth
excise tax to 74% of average final cigarette prices would
smoking by over 26% and prevent
bring the total reduction in smoking prevalence to over
13%, or almost 1.9 million adult smokers. 2.5 million youth from
taking up smoking.
Given the evidence on the health benefits of
smoking cessation, we estimate that 70% of those who
would have otherwise died prematurely from diseases
caused by smoking avoid premature death by quitting. price will reduce the number of premature deaths
Based on the assumption that half of long term smokers expected among current adult smokers by over
will die prematurely, we estimate that the price increase 180,000. A further increase that adopts a uniform
that would result from a uniform specific excise tax specific excise tax of 44 Rupees per pack and raises the
that, on average, accounts for 70% of final consumer excise tax to 74% of final consumer price would bring
the total reduction in premature deaths among current
adult smokers to nearly 650,000.
The price increase that would result from a
Considerable research shows that youth smoking
uniform specific excise tax that, on
is more responsive to price than adult smoking, with
average, accounts for 70% of final
estimates from high-income countries, as well as
consumer price will reduce the number of emerging evidence from low- and middle-income
premature deaths expected among countries, suggesting that price elasticity of cigarette
current adult smokers by over 180,000. demand among youth is two or more times higher than
it is among adults.35–37 Assuming that youth smoking in
A further increase that adopts a uniform Pakistan is twice as sensitive to price as is adult
smoking, we estimate that a uniform specific excise tax
specific excise tax of 44 Rupees per pack
accounting for 70% of cigarette prices, on average, will
and raises the excise tax to 74% of final
reduce youth smoking prevalence by about 7%,
consumer price would bring the total preventing almost 725,000 Pakistani youth from taking
reduction in premature deaths among up smoking. All smoking attributable premature deaths
current adult smokers to nearly 650,000. will be avoided among youth prevented from starting.
Based on the assumption that half of long-term
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 42

42 | The Economics of Tobacco and Tobacco Taxation in Pakistan

smokers will die prematurely because of their smoking, Tax Avoidance and Tax Evasion
this implies a reduction of over 350,000 deaths among
While the tobacco industry and others argue that
youth who do not initiate smoking as a result of this tax
increased tobacco taxes result in extensive tax
increase.
avoidance and tax evasion, existing evidence indicates
Further increasing the tax by taxing all cigarette that a variety of other factors are important
brands at 44 Rupees per pack would raise the total determinants of large scale, organized smuggling,
reduction in youth smoking prevalence to over 26% and individual tax avoidance, counterfeiting, and other
prevent over 2.5 million youth from taking up smoking. illicit cigarette trade.35 For example, while differences
The health impact would be significant, with almost 1.3 in cigarette taxes can contribute to the smuggling of
million deaths prevented among youth who do not cigarettes from low tax to high tax jurisdictions, pre-
initiate smoking as a result of this tax increase. tax price differences are often substantial and create a
financial incentive to smuggle. Other researchers have
Impact on the Poor found that the level of corruption in a county explains
at least as much of the extent of smuggling as is
Concerns about the impact of tobacco tax
explained by tax and price levels.55 Other important
increases on the poor are often raised in opposition to
determinants include the presence of an informal
higher cigarette taxes. As described above, estimates
distribution network for cigarettes within a country,
from a variety of countries, including India and
poor technology and communications at customs,
Bangladesh, show that smoking in lower income
weak or non-existent enforcement, and minimal
households is more responsive to changes in cigarette
penalties for those caught trading illegally in
prices than is smoking in high-income households.
cigarettes.35,48
These estimates imply that the reductions in smoking
among the poor that result from higher tobacco taxes In Pakistan, illicit trade in cigarettes is
will be larger than those that occur among rich so that problematic, with untaxed cigarettes accounting for
the health benefits that result from a tax increase will about one-third of overall cigarette consumption in
be progressive. Moreover, the differences in price 2011.14 Several factors contribute to illicit trade in
sensitivity imply that the relative burden of an Pakistan, most notably the long and porous border
increase in the tax will fall more heavily on richer with Afghanistan, poor monitoring and the resulting
households, given that a tax increase will reduce underreporting of production, the lack of regional
smoking by more in poorer households than in richer partnerships aimed at curbing illicit trade in tobacco
households. products and internal corruption. These factors
suggest that cigarette tax increase of the magnitude
To the extent that concerns remain about the
described above would likely lead to increased tax
impact of tobacco tax increases on the poor, these can
avoidance and evasion that would reduce, but not
be at least partly addressed by spending the new tax
eliminate, the public health and revenue impact of
revenues generated by the tax increase in a
tobacco tax increases.
progressive manner. Using the new revenues to
increase government spending on education, health Pakistan’s Federal Board of Revenue has taken
care, and social assistance programs that benefit the several actions in an effort to curb illicit trade,
poor can offset any negative impact of higher taxes on including: launching a media campaign to create
low-income smokers. awareness in the general public about the penalties
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 43

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 43

which can be imposed on persons involved in manufacturing, distribution, and retailing would
selling/purchasing non-duty paid cigarettes; creating facilitate such enforcement efforts. The additional
a task force in Peshawar city to investigate the sale of revenues generated from these activities would almost
non-duty paid and/or smuggled cigarettes; certainly more than pay for them many times over.30
monitoring transit trade with Afghanistan given that
this transit trade is a major source of smuggled Employment
cigarettes in Pakistan; and researching new
As described above, relatively few jobs in Pakistan
technologies for monitoring the production and
are dependent on tobacco, with tobacco farming
distribution of tobacco products in Pakistan.56
accounting for less than 0.5% of total agricultural
employment and tobacco manufacturing accounting
As described in WHO’s Technical Manual for
for less than 0.1% of manufacturing employment.
Tobacco Tax Administration, strengthened tax
Together, tobacco farming and tobacco product
administration would help keep problems with
manufacturing account for less than 0.2% of overall
increased illicit trade in tobacco products to a
employment in Pakistan. Given this, reductions in
minimum.30 One key step is the adoption of the
tobacco use that result from tax increases or other
recently approved Illicit Trade Protocol to the WHO
tobacco control activities will have little impact on
FCTC (ITP). Among its key provisions, the ITP calls
overall employment in Pakistan as the funds once
for the use of new, more sophisticated cigarette tax
spent on tobacco products are spent on other goods
stamps that are being used in an increasing number of
and services and as the government spends new tax
jurisdictions, that are more difficult to counterfeit,
revenues on more labor intensive activities, creating
and that allow better tracking and tracing of tobacco
new jobs that offset any loss of tobacco-dependent
products from the manufacturer to the retailer.
jobs. This has been demonstrated empirically for many
Similarly, tax authorities in Pakistan could adopt
countries, where reductions in tobacco use that result
state-of-the-art production monitoring technologies,
in job losses in the tobacco sectors are offset or more
such as those employed in Turkey and Brazil, coupled
than offset by increases in jobs in other sectors.35
with other pack markings to facilitate tracking and
tracing of cigarettes through the distribution chain. In To the extent that there are concerns about job
addition, imposing swift, severe penalties for those losses in more tobacco-dependent sectors or provinces,
caught engaging in illicit cigarette trade, and using a portion of new tobacco tax revenues generated
substantially enhancing enforcement efforts, by a tax increase to move tobacco farmers into other
particularly along the border with Afghanistan, would crops and/or to retrain those employed in tobacco
be effective in deterring illicit tobacco trade. product manufacturing for work in other sectors can
Requiring licenses for all engaged in tobacco product alleviate these concerns.

Endnotes for Chapter VII

U.S. Department of Health and Human Services. The Health Consequences of Smoking: A Report of the Surgeon General. Atlanta,
54

Georgia: U.S. Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National
Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. 2004.
Merriman D, Yurekli A, Chaloupka FJ. How big is the worldwide cigarette smuggling problem? In: Jha, P, Chaloupka FJ, eds. Tobacco
55

Control in Developing Countries. Oxford: Oxford University Press. 2000.

Aftab A, Kamboh GN. FBR-WHO Study-An analysis of Assessment, Illicit Trade and Impact of Joint Research on Excise Duty Assessment
56

of Cigarettes in Pakistan, 2009-10. Islamabad: Federal Board of Revenue. 2011.

Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 44

44 | The Economics of Tobacco and Tobacco Taxation in Pakistan

VII. Summary and Extensive research from a growing number of

Recommendations countries has documented the inverse relationship

between tobacco product prices and consumption.
Pakistan is no exception. Existing evidence as well as
Summary new estimates produced for this report clearly show
Pakistan has one of the largest populations of that falling cigarette prices lead to increases in
tobacco users in the world, with over 22 million adults smoking, while rising prices will reduce smoking, all
ages 18 or older smoking cigarettes, waterpipe, bidis, else constant. These estimates indicate that a 10%
or some other tobacco product and millions more increase in average cigarette prices in Pakistan will
using smokeless tobacco products, including gutka, lead to about a 5% reduction in cigarette consumption.
naswar, and paan. Almost one-third (32.4%) of men Evidence on the impact of income on cigarette
and 5.7% of women smoke tobacco, and 15.9% of adult smoking is mixed, but the new evidence produced in
Pakistanis are daily smokers. A significant number of this report shows that rising incomes will lead to
Pakistani youth consume tobacco products, and significantly more smoking in Pakistan, consistent
relative rates of smoking among girls versus boys are with the existing empirical evidence for most low- and
higher than among women versus men, raising middle-income countries.
concerns about significantly increased prevalence The cigarette tax structure in Pakistan is
among women in future years. Given the high levels of complicated, with a tiered structure that imposes
tobacco use, Pakistan faces considerable health and different excise taxes based on retail cigarette prices.
economic consequences from tobacco. Until 2013, the system was comprised of a specific tax
The growing recognition of these problems has led applied to low priced cigarettes, an ad valorem tax
to changes in the tobacco control environment in levied on high priced cigarettes, and a combination of
Pakistan, including the adoption of limits on tobacco specific and ad valorem taxes applied to mid-priced
use in a variety of public places and workplaces, some cigarettes. The tax system was simplified in the
limits on tobacco company marketing, graphic warning 2013–14 budget — ad valorem taxes were eliminated
labels on smoked tobacco products, and a ban on the and three tiers were collapsed into two, although the
manufacture, distribution and sale of smokeless gap in tax between the lower and the higher tier is still
tobacco products. However, these policies are not substantial. Cigarette excise taxes in Pakistan account
comprehensive and are often poorly implemented and for just over half of final cigarette prices paid by
enforced; strengthening them is critical to ensuring consumers on average, while total taxes on cigarettes
that reductions in smoking in Pakistan continue into account for almost two-thirds of final prices. This is
the future. below the level in countries that have taken a
comprehensive approach to reducing tobacco use,
At the same time, cigarette prices in Pakistan are where taxes account for 70% or more of price, and the
among the lowest in the world, and real cigarette prices excise tax share is below the 70% level recommended
have been falling and increases in income have made by the World Health Organization.
cigarettes increasingly affordable over much of the past
two decades. These trends, however, have seen Based on existing and new estimates, we modeled
reversals in recent years as cigarette taxes have been the impact of changes in the existing tax structure and
increased, raising real cigarette prices and reducing the rates. Eliminating the tiered tax structure and adopting
affordability of cigarettes. a uniform specific excise tax of 31.2 Rupees per pack of
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 45

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 45

20 cigarettes, so that the cigarette excise tax would with a uniform specific tax on all cigarettes would
account for 70% of final prices as recommended by eliminate opportunities for tax avoidance
WHO would raise average prices by over 15% and through misclassification or repositioning of
reduce cigarette consumption by 7.5%. In addition, brands and send the clear message that all
this tax and price increase will lead over one-half cigarettes are equally harmful, while reducing
million current Pakistani cigarette smokers ages 18 the incentives for substitution to less expensive
and older to quit smoking, while preventing almost cigarettes in response to a tax increase. By
725,000 Pakistani youth under 18 from taking up raising prices, this tax increase will prevent
cigarette smoking. Together, these reductions in cigarette smoking initiation, promote cessation,
smoking will prevent over one-half million premature lower consumption among continuing smokers,
deaths caused by tobacco use in the current population and reduce the death, disease, and economic
cohort. At the same time, because of the inelasticity of costs that result from smoking. The recent switch
cigarette demand, the tax increase will generate over to a two-tiered specific system is an important
27 billion Rupees (US$0.3 billion) in new cigarette tax first step in simplifying taxes. However, given the
revenues. A larger tax increase — one that taxes all fact that tobacco excise taxes continue to be
brands at 44 Rupees per pack of 20 cigarettes — would lower for the majority of brands in the market
have a much greater public health impact, while compared to the equally harmful but higher
generating even higher revenues. priced brands, an increase in the lower tier tax
will be important in the medium term as an
Recommendations intermediate step towards equalizing taxes at a
uniform, higher level.
Given this evidence, we make the following
recommendations:
(2) Implement annual adjustments to tobacco tax
(1) Adopt a high uniform specific cigarette rates so that they retain their real value over
excise tax that significantly raises cigarette time and are not eroded by inflation.
prices and reduces tobacco use. One caveat associated with the proposed uniform
The current tax structure that applies different tax excise tax on cigarettes recommended above is
rates on cigarettes based on retail price simplifies that the real value of this tax will be eroded over
the more complex mixed system used in prior time by inflation. In Pakistan, despite periodic
years, but continues to result in relatively low increases in cigarette tax rates and increases in
prices for the majority of cigarette brands and the price tiers to which they apply, real cigarette
large differences in prices between high and low price have fallen for much of the past 20 years.
priced brands. One consequence of this is that These falling real cigarette prices result in higher
increases in cigarette tax rates will have less levels of cigarette consumption, together with its
impact on public health than they would if a health and economic consequences. Annual or
single uniform specific tax was applied to all more frequent adjustments of the proposed
cigarettes, since the large price differences uniform specific cigarette tax will maintain its
continue to create an incentive to switch down to real value over time which will maximize the
cheaper cigarettes in response to tax increases. public health and revenue impact of the tax.
Replacing Pakistan’s tiered excise tax structure
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 46

46 | The Economics of Tobacco and Tobacco Taxation in Pakistan

(3) Implement annual adjustments to tobacco (5) Strengthen tobacco tax administration,
excise tax rates so that they result in increase enforcement, and tax duty free sales of
increases in tobacco product prices that are tobacco products in order to reduce tax evasion
at least as large as increases in per capita and avoidance.
incomes.
Tax avoidance and tax evasion in Pakistan cost
New evidence provided in this study clearly the government revenue and adversely affect
shows that cigarette demand in Pakistan rises public health. As called for in the recently adopted
with income. For much of the past two Illicit Trade Protocol to the WHO Framework
decades, the combination of falling real Convention on Tobacco Use, several steps should
cigarette prices and rising incomes has led to be undertaken to strengthen tobacco tax
cigarettes becoming much more affordable in administration in Pakistan. First, a well
Pakistan. This increasing affordability established monitoring system should be put in
resulted in more cigarette smoking than would place that employs new technologies for
have otherwise been the case. In addition to monitoring the production and distribution of
raising taxes to offset the effects of inflation, tobacco products. These new technologies include
further increases in excise taxes that reduce adoption of: a state-of-the-art production
the affordability of cigarettes are needed in monitoring system; the new generation of more
order to improve public health by reducing sophisticated, hard to counterfeit tax stamps; and
smoking. a tracking-and-tracing system that can follow
tobacco products through the distribution chain.
(4) Increase taxes on other tobacco products to
The government’s initial investment in these
be equivalent to cigarette taxes and to
technologies would almost certainly more than
reduce the use of these products.
pay for itself through the revenues collected on
Equating taxes on all tobacco products reduces products for which taxes would otherwise not
incentives to substitute from higher taxed have been paid.
products to lower taxed products, maximizing
Pakistani tax administrators’ capacity for tracking
the health and revenue impact of these taxes.
and tracing should be further strengthened by
Specific taxes on these products should be
licensing all involved in tobacco production and
annually increased so that they keep pace with
distribution and resources should be allocated to
inflation and do not fall in real terms over
enforcing tax policies. When done in combination
time. In addition to indexing, tobacco taxes
with the adoption of the technologies discussed
should be regularly increased over time, with
above, licensing would be highly useful in
the long run objective of tobacco excise taxes
enforcement efforts and allow customs to more
accounting for at least 70% of average prices,
easily identify illicit product and to identify those
as recommended by WHO. Once that goal is
higher up in the distribution chain that are
achieved, subsequent increases should be
responsible. Severe administrative penalties
adopted that are sufficient to further reduce
should be imposed on those caught engaging in
the affordability of tobacco products.
tax evasion so as to significantly increase the
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 47

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 47

swiftness and severity of these penalties, making programs that help existing tobacco users quit,
them a greater deterrent. Again, the government’s particularly among the poor, and that support
investment in enhanced enforcement efforts would other programs targeting the poor will reduce
almost certainly more than pay for themselves any potentially regressive impact of the higher
through the increased taxes collected from taxes on the large segment of the Pakistani
previously untaxed products. population that lives in poverty. Moreover,
earmarking of tobacco tax revenues for health
All taxes should be applied to tobacco products sold
purposes increases public support for tax
in duty free outlets. Doing so increases the public
increases and adds to the impact of these tax
health impact of higher tobacco taxes by raising all
increases on health and development. This
tobacco product prices and by reducing
includes dedicating a portion of tobacco tax
opportunities for tax avoidance and evasion, while
revenues for comprehensive tobacco control
at the same time generating additional revenues.
programs that include, but are not limited to,
support for community level interventions, mass
(6) Earmark tobacco tax revenues for health
media public education campaigns about the
purposes, including health promotion and
harms from tobacco use, provision of support for
tobacco control
smokers trying to quit smoking and efforts to
Higher tobacco taxes will generate significant new prevent young people from taking up tobacco
revenues. Using these revenues to support use.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 48

48 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Acknowledgments
The International Union Against Tuberculosis and Lung Disease (The Union), under the Bloomberg Initiative to
Reduce Tobacco Use, provided funding for this report.

We are grateful to Ayda Yürekli, World Health Organization for facilitating several of the key collaborations that
enabled the writing of this report and for having commented on multiple drafts, and Mr. Mumtaz Haider Rizvi,
previously Chairman, Federal Board of Revenue Pakistan for encouraging and supporting collaboration on this
report. We thank Kelly Henning, Neena Prasad and Sarah England, Bloomberg Philanthropies for their inputs on
successive drafts of this report and Richard Gallagher of Gallagher Associates for his editorial assistance.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 49

S. J. Burki, A. G. Pasha, H. A. Pasha, R. John, P. Jha, A. A. Baloch, G. N. Kamboh, R. Cherukupalli, F. J. Chaloupka | 49

Bibliography

Adioetomo SM, Djutaharta T, Hendratno. Cigarette Consumption, Taxation And Household Income: Indonesia Case Study. HNP Discussion
Paper. Washington DC: The World Bank. 2005.

Aftab A, Kamboh GN. FBR-WHO Study-An analysis of Assessment, Illicit Trade and Impact of Joint Research on Excise Duty Assessment of
Cigarettes in Pakistan, 2009-10. Islamabad: Federal Board of Revenue. 2011.

Alam AY, Iqbal A, Mohamud KB, Laporte RE, Ahmded A, Nishtar S. Investigating socio-economic-demographic determinants of tobacco
use in Rawalpindi, Pakistan. BMC Public Health. 2008;8:50.

Ali Z, Rahman A, Rahaman T. An Economic Analysis of Tobacco Control in Bangladesh. HNP Discussion Paper. Washington DC: The World
Bank. 2003.

Aloui O. Analysis of the Economics of Tobacco in Morocco. HNP Discussion Paper. Washington DC: The World Bank. 2003.

BR Research. Tobacco support price: a sign of hope or a disappointment? Business Recorder. December 16, 2011.

Centers for Disease Control and Prevention. Annual smoking-attributable mortality, years of potential life lost, and economic costs---
United States, 2000--2004. Morbidity and Mortality Weekly Report. 2006;57(45);1226-1228.

Deaton AS. Quantity, quality, and spatial variation of price. American Economic Review. 1988;78:418-430.

Doll R, Peto R, Boreham J, Sutherland I. Mortality from cancer in relation to smoking: 50 years' observations on British doctors Br J Cancer
2005.

ERC Group. World Cigarettes 1/2009. Suffolk, England: ERC-World. 2009.

Euromonitor International. Pakistan: Country Sector Briefings. London: Euromonitor International. 2010.

Euromonitor International. Pakistan: Country Sector Briefings. London: Euromonitor International. 2011.

Euromonitor International. Tobacco in Pakistan: Industry Overview. London: Euromonitor International. 2013.

FAOSTAT. Food and Agricultural Organization of the United Nations. 2013. Available at: http://faostat.fao.org/site/291/default.aspx.
Accessed February 15, 2013.

Gay G. Fuzzy math. Tobacco Reporter. April 2008.

Global Tobacco Surveillance System. Global Adult Tobacco Survey - India Report 2009-10. Deonar, Mumbai, India: International Institute
for Population Sciences. 2010.

Global Burden of Disease [database on the internet]. Institute for Health Metrics and Evaluation (IHME). Available from
healthmetricsandevaluation.org/gbd/.

Global Tobacco Surveillance System. Global Adult Tobacco Survey (GATS) - Fact Sheet, Bangladesh: 2009. Atlanta GA: U.S. Department
of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National Center for Chronic Disease
Prevention and Health Promotion, Office on Smoking and Health. 2009.

Global Youth Tobacco Survey. Karachi, Pakistan (Ages 13-15) Global Youth Tobacco Survey (GYTS) Fact Sheet. Atlanta GA: U.S.
Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National Center for
Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. 2008.

Global Youth Tobacco Survey. Pakistan (Ages 13-15) Global Youth Tobacco Survey (GYTS) Fact Sheets - various cities and years. Atlanta
GA: U.S. Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National Center
for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. 2012. Available at:
http://www.cdc.gov/tobacco/global. Accessed January 20, 2012.

Guindon GE, Nandi A, Chaloupka FJ, Jha P. Socioeconomic Differences in the Impact of Smoking Tobacco and Alcohol Prices on
Smoking in India. National Bureau of Economic Research Working Paper Number 17580. Cambridge, Massachusetts: National Bureau of
Economic Research. 2011.

Guindon GE, Perucic AM, Boisclair D. Higher Tobacco Prices and Taxes in South-East Asia: An Effective Tool to Reduce Tobacco Use, Save
Lives, and Generate Revenue. HNP Discussion Paper. Washington DC: The World Bank. 2003.

Hu TW, Mao Z. Effects of cigarette tax on cigarette consumption and the Chinese economy. Tobacco control. 2002;11(2):105–8.

International Agency for Research on Cancer. Effectiveness of Tax and Price Policies for Tobacco Control: IARC Handbook of Cancer
Prevention, Volume 14. Lyon, France: International Agency for Research on Cancer. 2011.

International Agency for Research on Cancer. Tobacco Control: Reversal of Risk after Quitting Smoking, IARC Handbook of Cancer
Prevention, Volume 11. Lyon, France: International Agency for Research on Cancer. 2007.

Jha P, Chaloupka FJ, editors. Tobacco Control in Developing Countries. Oxford: Oxford University Press. 2000.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page 50

50 | The Economics of Tobacco and Tobacco Taxation in Pakistan

Jha P, Chaloupka FJ, Moore J, Gajalakshmi V, Gupta PC, Peck R, Asma S, Zatonski W. Tobacco addiction. In: Jamison DT, Breman JG, et
al. eds., Disease control priorities in developing countries. 2nd ed. Washington DC: International Bank for Reconstruction and
Development/World Bank. 2006;869-885.

Jha P, Chaloupka FJ. Curbing the Epidemic: Governments and the Economics of Tobacco Control. Washington, D.C.: International Bank
for Reconstruction and Development/World Bank. 1999.

Jha P, Jacob B, Gajalakshmi V, et al. A nationally representative case-control study of smoking and death in India. N Engl J Med. 2008

Jha P, Musgrove P, Chaloupka FJ, Yurekli A. The economic rationale for intervention in the tobacco market. In: Jha, P, Chaloupka FJ, eds.
Tobacco Control in Developing Countries. Oxford: Oxford University Press. 2000.

John RM, Sung HY, Max W. Economic cost of tobacco use in India, 2004. Tobacco Control. 2009;18:138-143.

John RM. Price elasticity estimates for tobacco products in India. Health Policy and Planning. 2008;23:200-209.

Karki YB, Pant KD, Pande BT. A Study on the Economics of Tobacco in Nepal. HNP Discussion Paper. Washington DC: The World Bank. 2003.

Kirstin Pirie , Richard Peto, Gillian K Reeves, Jane Green, Valerie Beral for the Million Women Study Collaborators The 21st century hazards
of smoking and benefits of stopping: a prospective study of one million women in the UK. The Lancet - 12 January 2013 ( Vol. 381, Issue
9861, Pages 133-141).

Kyaing NN. Tobacco Economics in Myanmar. HNP Discussion Paper. Washington DC: The World Bank. 2003.

Laxminarayan R, Deolalikar A. Tobacco initiation, cessation, and change: evidence from Vietnam. Health Economics. 2004;13:1191-1201.

Mathers CD, Loncar D. Projections of Global Mortality and Burden of Disease from 2002 to 2030. PLoS Med. 2006; 3(11): e442. Available at:
http://www.plosmedicine.org/article/info:doi/10.1371/journal.pmed.0030442. Accessed March 31, 2010.

Merriman D, Yurekli A, Chaloupka FJ. How big is the worldwide cigarette smuggling problem? In: Jha, P, Chaloupka FJ, eds. Tobacco
Control in Developing Countries. Oxford: Oxford University Press. 2000.

Mushtaq N, Mushtaq S, Beebe L. Economics of tobacco control in Pakistan: Estimating elasticities of cigarette demand. Tobacco Control
2011;20:431-435.

Nargis N, Ruthbah UH, Fong GT. Taxation of Tobacco Products in Bangladesh: Findings from the 2009 ITC Bangladesh Survey. ITC Project
Working Paper Series. Waterloo, Ontario, Canada: University of Waterloo. 2010.

Nargis N, Ruthbah UH, Hussain AKMG, Ashiquzzaman SM, Fong GT, Huq I. Pricing and Taxation of Tobacco Products in Bangladesh:
Findings from Wave 1 (2009) and Wave 2 (2010) of the ITC Bangladesh Survey. ITC Project Working Paper Series. Waterloo, Ontario,
Canada: University of Waterloo. 2011.

Prabhat Jha, et al.21st-Century Hazards of Smoking and Benefits of Cessation in the United States. N Engl J Med 2013; 368:341-350.

Sakata R, McGale P, Grant EJ, Ozasa K, Peto R, Darby SC. Impact of smoking on mortality and life expectancy in Japanese smokers: a
prospective cohort study. British Medical Journal 2012 Oct 25;345:e7093.

Sayginsoy O, Yurekli A, de Beyer J. Cigarette Demand, Taxation, and the Poor: A Case Study of Bulgaria. HNP Discussion Paper.
Washington DC: The World Bank. 2002.

Thun MJ, Carter BD, Feskanich D, et al. 50-Year trends in smoking-related deaths in the United States. N Engl J Med 2013;368:361-374.

U.S. Department of Health and Human Services. The Health Consequences of Involuntary Exposure to Tobacco Smoke: A Report of the
Surgeon General. Atlanta, Georgia: U.S. Department of Health and Human Services, Public Health Service, Centers for Disease Control
and Prevention, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. 2006.

U.S. Department of Health and Human Services. The Health Consequences of Smoking: A Report of the Surgeon General. Atlanta,
Georgia: U.S. Department of Health and Human Services, Public Health Service, Centers for Disease Control and Prevention, National
Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. 2004.

Van Walbeek CP. The distributional impact of changes in tobacco prices. The South African Journal of Economics. 2002;70(3):258-267.

World Health Organization. Impact of Tobacco-related Illnesses in Bangladesh. New Delhi, India: World Health Organization, Regional
Office for South-East Asia. 2007.

World Health Organization. WHO Framework Convention on Tobacco Control. Geneva: World Health Organization. 2003.

World Health Organization. WHO Report on the Global Tobacco Epidemic, 2008: The MPOWER Package. Geneva: World Health
Organization. 2008.

World Health Organization. WHO Report on the Global Tobacco Epidemic, 2011: Implementing Smoke-Free Environments. Geneva: World
Health Organization. 2011.

World Health Organization. WHO Report on the Global Tobacco Epidemic, 2013: Enforcing bans on tobacco advertising, promotion and
sponsorship. Geneva: World Health Organization. 2013.

World Health Organization. WHO Technical Manual on Tobacco Tax Administration. Geneva: World Health Organization. 2010.

World Health Survey. Report of Pakistan. Geneva: World Health Organization. 2003.
Pakistan-Report-proof forPrint-March2014F_SH-2_Pakistan Report 3/25/14 2:17 PM Page BC2

December 2013

ISBN: 979-10-91287-10-4