Pakistan: Increase in Size of GHW Leading Cigarette Firm Warns of Shortfall in Revenue Collection

Source from:  Business Recorder 02/25/2015

A leading multinational cigarette manufacturing company has conveyed to the Federal Board of Revenue (FBR) that projected revenue collection from legitimate tobacco industry will witness major shortfall in 2014-15 following increase in the size of Graphical Health Warning (GHW) on cigarette packs front/back to 85 percent (currently 40 percent) by March 30, 2015.

In a communication to the FBR Chairman Tariq Bajwa here on Tuesday, Alejandro Paschalides, Managing Director for Philip Morris (Pakistan) Limited, said that such ad hoc initiatives will negatively impact the projected future government revenue growth and contribution.

On February 12, 2015 the Minister for National Health Services, Regulation & Co-ordination (MNHSRC) in a press conference announced her intention to increase the size of GHW on cigarette packs front and back to 85 percent (currently 40 percent) by March 30, 2015 (Proposed Regulation) quoting that Pakistan will be third country in the world after Thailand and India to have 85 percent GHW. The company fundamentally supports regulations mandating health warnings to be placed on cigarette packs, but it has a number of serious concerns with the Minister's declaration, it said.

Under the Constitution of Pakistan, the provinces are vested with the jurisdiction on the subject of health and not the federation. The Proposed Regulation, if issued, will violate the Constitution, our constitutional rights, the trademark law and Pakistan's international obligations.

This decision is made arbitrarily, without authority and without consulting important stakeholders and with a complete disregard to other consequences such as increase in consumption of smuggled cigarettes available below legal minimum price. Decline in legal industry volumes is negatively impacting the projected government revenue as the illicit market diverts sales from the legal cigarette industry.

The Framework Convention on Tobacco Control (FCTC) is being used as a pretext. The proposed 85% GHW drastically exceeds the health warning sizes referenced in the FCTC (ie a minimum of 30%). There is no consistent and credible evidence that extra-large GHWs will have any discernible impact on reducing or discouraging tobacco use.

The lack of regulatory road map, understanding, non-consultative approach and such ad hoc measures will adversely impact the investment climate of the country, the company said. The company said after introduction of health warning of the size of 40 percent in 2010, the sale of smuggled brands (like PINE which carries no health warning at all) almost doubled in Pakistan in a short period of time.

Already approximately one out of every four cigarettes sold in Pakistan is illicit. According to Oxford Economics 2013 report, every year the Government of Pakistan suffers a loss of more than Rs 26 billion due to sale of illicit cigarette packets in Pakistan. If the new measure is indeed implemented, this annual loss to national exchequer will increase substantially as more consumers will switch to smuggled non-compliant cigarette packets that do not carry any health warning.

It said that as more consumers switch to smuggled packs, there would be a substantial decrease in the revenue contribution by the legitimate cigarette industry. The legal tobacco industry contributes approximately 39 percent of the total excise revenue of Pakistan, in addition to other taxes such as sales lax, corporate tax and import duties. The tobacco industry generates employment opportunities for more than a million people through direct and indirect employment, farmers, distributors, wholesalers and retailers. Over the years, the tobacco industry has given a consistent growth in government revenue of approximately 15 percent year on year. As a consequence of this proposed regulation, the company expects the projected government revenue from the legitimate tobacco industry during the FY 2014-2015 will decrease substantially. In addition, such ad hoc initiatives will negatively impact the projected future government revenue growth and contribution.

Given the above concerns, the FBR should advise the MNHSRC to immediately rescind the intention of issuing the Proposed Regulation as it impacts, specifically, the livelihoods of those adversely impacted, 'potential foreign direct investment, and rights to operate as a legitimate industry in Pakistan with no appreciable reciprocal advantage. The company has requested an audience to discuss in detail our concerns and seek your support in ensuring that all regulations passed are in line with the Constitution and various laws with a view to protecting the country's tax base, welcoming FDI and making decisions in a transparent, evidence based and reasonable manner, the company said.

The company added that there is no entry relating to general public health or tobacco control in the Federal Legislative List and for this reason the Ministry of Health at the federal level was dissolved during the implementation of devolution plan after the 18th Amendment to the Constitution. In the absence of such entry, the federation has no jurisdiction to administer the tobacco related laws. The subject of health is a provincial subject and therefore the legislative jurisdiction on the subject vests with the provinces. Any attempt by the federation to regulate on the subject of health will clearly violate the distribution of powers between the federal government and provinces enshrined in the Constitution. As such, any action by the MNHSRC to issue regulations related to health matters, will be ultra vires to the Constitution where the MNHSRC will be acting beyond the scope of the federally enumerated powers. This is further substantiated when in the year 2012, the Cabinet Division, which was then the parent to the Ministry of Health Services Academy (now replaced by MNHSRC), addressed letters to the provincial governments forwarding a draft notification for revising the graphic health warning. Federation's request through a division of MNHSRC to the provinces for issuing the proposed notification clearly acknowledges that the tobacco control function has devolved upon the provincial governments.

A health warning doesn't have to totally dominate the pack to still be clear and very visible. The company firmly believes that the current GHW clearly communicates the health risks of smoking and given the significant negative impact that this Proposed Regulation will have on our trademarks and packaging we do not support any increase in the GHW, the company added.