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Short-Sighted Policies: IMF Urges High Taxation on Already Heavily Taxed Tobacco Sectors

The recent recommendation by the International Monetary Fund (IMF) to impose higher taxes on the already heavily taxed tobacco sector is a short-sighted policy that risks exacerbating the proliferation of illicit cigarettes.

While ostensibly aimed at bolstering government revenue and discouraging tobacco consumption, such measures are likely to have unintended consequences that undermine the economy, public health, and create an uneven playing field for legal tobacco companies.

The IMF’s proposal fails to account for the complex dynamics of the tobacco market, where excessive taxation incentivizes illicit trade and drives consumers toward unregulated, cheaper tobacco products.

‘By burdening legal tobacco companies with higher taxes, the government will inadvertently create a further price differential that makes illicit cigarettes more attractive to price-sensitive consumers’, said Osama Siddiqui, a macroeconomic analyst.

‘This not only deprives the government of legitimate tax revenue but also undermine
s public health initiatives aimed at reducing tobacco consumption,’ he said.

It is pertinent to mention that the market share of illicit cigarettes has now reached 63% due to the last tax hike in February 2023, up from 40%, leading to an annual loss of Rs 310 billion.

‘Instead of resorting to blanket taxation measures, the government must adopt a more nuanced approach that addresses the root causes of illicit trade. This includes strengthening enforcement mechanisms, implementing a track and trace system in all tobacco companies, and enforcing strict crackdowns against the manufacturers and sellers of illicit cigarettes’, Osama added.

He concluded that by heeding these recommendations, the government can strike a balance between fiscal objectives and public health imperatives, ensuring that taxation policies serve the interests of both the economy and the well-being of its citizens.

Source: ProPakistani