Cigarette Excise Taxes in Pakistan
Executive Summary
Cigarettes are inexpensive in Pakistan and are by far the most widely sold tobacco product in the country . The most popular brands cost PKR 18.40 per pack of 20 (USD 0.25 per pack at the current exchange rate). In part because cigarettes are inexpensive, annual consumption of cigarettes has increased (from 292 cigarettes per capita in 1994 to 406 cigarettes per capita in 2007). This raises serious health concerns. A proven intervention to reduce smoking is to raise the price of cigarettes relative to other products by increasing excises on cigarettes. Although Pakistan adjusts its cigarette excises almost every year, the rates have not kept pace with inflation and the growth of per capita income. Excise revenue has fallen from 0.5 percent of GDP in 1994 to 0.3 percent of GDP in 2007. This report assesses Pakistan’s excises on cigarettes.
Domestic cigarettes are classified into three tiers based on the retail price before value added tax (VAT). Each tier is subject to a different excise regime. Cigarettes in Tier I (the lowest-priced cigarettes) are subject only to a specific excise of PKR 6.34 per pack. Cigarettes in Tier II (cigarettes in the mid-price range) are subject to mixed regime comprising a PKR 6.34 per pack specific excise and an incremental 69 percent ad valorem excise. Cigarettes in Tier III (the highest-priced cigarettes) are subject only to a 63 percent ad valorem excise.
To reduce consumption, increase government revenue, and simplify the excise regime, Pakistan should return to a two-tier regime similar to what was abandoned in 2001. For cigarettes priced lower than PKR 28.00 per pack-the first tier-the excise would be a specific rate of PKR 15.00 per pack. For cigarettes priced PKR 28.00 per pack or higher-the second tier-the excise tax would be 63 per cent of the retail price before VAT. Going forward, the specific rate and the price bracket between the two tiers would be automatically indexed for inflation. Under the proposal, over 80 percent of all cigarettes would be in the first tier and subject to the specific excise.
Assuming the excise tax is fully passed through to consumers, adoption of this proposal will lead to a 50 percent increase in the price of the most popular brands and more than double the excise tax on these brands. Consumption of cigarettes will decline by 18 percent, providing significant health benefits, and the government’s revenue from cigarette excises will increase by 47 percent.
A. Current Situation
Taxes on cigarettes and other tobacco products
Cigarettes are by far the most important tobacco product in Pakistan. The federal government levies excises on cigarettes, which are collected at the manufacturing stage by the Federal Bureau of Revenue (FBR). [1] Domestic cigarettes are classified into three tiers based on the retail price before value added tax (VAT), which is printed on each pack, along with the VAT-inclusive price. Each tier is subject to a different excise regime. Cigarettes in Tier I (the lowest-priced cigarettes) are subject only to a specific excise (based on quantity). Cigarettes in Tier II (cigarettes in the mid-price range) are subject to mixed regime comprising a specific excise and an incremental ad valorem excise (based on value). Cigarettes in Tier III (the highest-priced cigarettes) are subject only to an ad valorem excise (Figure 1). From June 2008, the rates are as follows:
Tier
Retail Price Per Pack
(Before VAT)
Excise duty
Tier I
Below PKR 14.86
PKR 6.34
Tier II
From PKR 14.86 to PKR 32.00
PKR 6.34 + 69% per incremental rupee over PKR 14.86
Tier III
Above PKR 32.00
63% of the retail price before VAT
Figure 1. Tax per pack of 20 cigarettes and current prices before VAT
All imported cigarettes, of which there are only limited quantities (less than 3 percent of the market), are subject to an ad valorem excise of 63 percent of the retail price (before VAT). Thus, all imports are excised the same as Tier III domestic cigarettes. [2] Unmanufactured tobacco is excised at a rate of PKR 5 per kilogram. To avoid tax on tax, this input tax may be claimed as a credit against the excise charged on manufactured cigarettes (or other final tobacco products). The credit is available at the time when excise duty is paid on the manufactured tobacco products. [3] Tobacco products other than cigarettes are excised at 63 percent of their retail price. In addition to the excise, cigarettes are subject to the 16 percent VAT which is collected at each stage of production and distribution. [4]
There are a number of exemptions for tobacco products included in the Third Schedule of the Federal Excise Act: (i) if made by hand in the tapered shape of biris (or bidis) without the use of any manual or power-operated machine in any process of their manufacture; (ii) if supplied to the Navy for consumption on board its vessels; (iii) if supplied for consumption by the President of Pakistan, the President of Azad Jammu & Kashmir and the Governors of the Provinces, members of their families and guests; and (iv) if supplied to duty free shops.
According to documents from industry, cigarettes cannot sell for less than PKR 14.48 per pack (about USD 0.20 per pack at the current exchange rate). [5] This is not being enforced, as lower-priced cigarettes are available. [6]
In 2007-08, the excises on tobacco products raised PKR 28.52 billion. Tobacco excises have steadily declined from 0.52 percent of GDP in 1992-93 to 0.28 percent of GDP in 2007-08 (Table 1) and from 5.6 percent of federal taxes in 1992-93 to 3.4 percent in 2006-07 . The declining importance of tobacco excise revenue amidst a stable share of total federal taxes in GDP reflects, in part, a decline in all excise taxes, and the growing importance of the sales tax.
Table 1. Share of excise taxes on tobacco in GDP
Fiscal Year
GDP
(PKR billions)
Tobacco excise tax
(PKR billions)
Tobacco excise tax as a share of GDP
1992-93
1,620.62
8.51
0.52%
1993-94
1,897.88
8.61
0.45%
1994-95
2,268.46
10.03
0.44%
1995-96
2,577.56
11.59
0.45%
1996-97
2,952.18
11.71
0.40%
1997-98
3,255.31
13.12
0.40%
1998-99
3,572.28
15.12
0.42%
1999-00
3,826.11
14.34
0.37%
2000-01
4,209.87
16.36
0.39%
2001-02
4,452.65
16.56
0.37%
2002-03
4,875.65
17.28
0.35%
2003-04
5,640.58
18.40
0.33%
2004-05
6,499.78
21.88
0.34%
2005-06
7,593.85
23.10
0.30%
2006-07
8,706.92
28.41
0.33%
2007-08
10,009.68
28.52
0.28%
Source: IMF, Federal Bureau of Revenue, authors’ calculation.
Structure of the industry
There are 42 registered cigarette manufacturers, but only 24 manufacturers are currently producing cigarettes. [7] The market is dominated by two companies: Lakson Tobacco Company (LTC), which is a subsidiary of Phillip Morris International (PMI) and Pakistan Tobacco Company (PTC), which is a subsidiary of British American Tobacco (BAT) (Table 2). LTC has gradually increased its market share from 36 percent in 2000 to 47 percent in 2007. Small companies now produce only about 5 percent of the duty paid domestic cigarettes.
Table 2. Market shares of the main tobacco manufacturers
Manufacturer
Affiliation
2000
2001
2002
2003
2004
2005
2006
2007
Lakson Tobacco Company
PMI
35.6
42.2
45.7
47.1
48.1
46.8
46.0
47.0
Pakistan Tobacco Company
BAT
53.9
47.5
46.4
46.5
46.7
50.4
51.0
48.4
Other manufacturers
NA
10.5
10.3
7.9
6.4
5.2
2.8
3.0
4.6
Source: Tobacco Merchants’ Association
The two leading brands are Morven (produced by LTC – 37.6 percent market share) and Gold Flake (produced by PTC – 29.5 percent market share), both in the first tier. Along with Embassy and other first tier brands, they account for about 85 percent of the market, with the remaining 15% split between second and third tier brands.
Non duty paid illicit cigarettes are widely available. The general industry consensus, which is also shared by the government, is that such cigarettes account for about 20 percent of all cigarettes sold in Pakistan and most of them are produced illegally in Pakistan by small manufacturers active in the North-West Frontier and the Northern Areas.
B. Issues
Rising Consumption and Declining Revenues
Annual consumption of cigarettes in Pakistan has increased from 292 cigarettes per capita in 1994 to 406 cigarettes per capita in 2007 (Figure 2). During this same period, tobacco excise revenue has fallen from 0.5 percent of GDP to 0.3 percent. The decline in revenue is primarily due to excise rates not keeping pace with the growth of per capita income, and to adding a new tier in 2001, which reduced the tax on cigarettes in the mid-price range (Figure 3).
Figure 2: Per capita consumption of cigarettes and excise revenue as share of GDP
Figure 3: Tax per pack before and after the introduction of the three-tier system
Total Tax
The total tax on cigarettes is too low to meet public health objectives. The World Bank found that in countries with comprehensive tobacco control policies, taxes (excise plus VAT or sales tax) accounts for two-thirds to four-fifths of the retail price of cigarettes. [8] In Pakistan the three most widely sold brands have a total tax burden of slightly more than 50 percent (Table 3), well below the World Bank recommended tax burden. Up-market brands such as Gold Leaf, just fall within the World Bank Standard, with a total tax burden of 68 percent. [9]
Table 3. Total tax on cigarettes for major brands, in 2008 (in PKR per pack)
Gold Flake
Morven
Embassy
Capstan
Gold Leaf
[A]
Estimated market share (2006)
29.5%
37.6%
6.7%
7.8%
9.4%
[B]
Retail price
18.40
18.40
17.24
34.30
49.00
[C]
VAT (13.8 percent of final retail price)
2.54
2.54
2.38
4.74
6.76
[D]
Excise tax
7.03
7.03
6.34
16.48
26.61
[E]
Pre-tax price = [B]-[C]-[D]
8.83
8.83
8.52
13.08
15.63
[F]
Total tax = [C]+[D]
9.57
9.57
8.72
21.22
33.37
[G]
Share of excise = [D]/[B]
38.2%
38.2%
36.8%
48.0%
54.3%
[H]
Share of taxes = ([C]+[D])/[B]
52.0%
52.0%
50.6%
61.9%
68.1%
Ad valorem vs. Specific
Over the period 1986-2007, countries within the Asia Pacific region have been switching from ad valorem excises or ad valorem and specific excises on cigarettes to specific excises. [10] Currently, 19 of the 27 countries in the Asia Pacific region impose specific excises on cigarettes, [11] some of which adjust taxes for inflation on a mandated regular basis. Seven of these countries (Australia, Hong Kong, Macau, Mongolia, New Zealand, Singapore, and Taiwan) impose a single specific rate; that is, there are no tiers. [12] Four countries impose only ad valorem rates on cigarettes, [13] and four countries (including Pakistan) impose both specific and ad valorem rates. [14]
A strong case can be made for Pakistan adopting a specific tax regime for excising cigarettes:
If a primary purpose of the cigarette excise-in addition to raising revenue-is to discourage consumption, the tax should be levied on the number of cigarettes (or packs of cigarettes) consumed.
Specific excises limit brand switching to cheaper cigarettes and thus are more effective in reducing smoking prevalence. In contrast, ad valorem excises, all other things equal, lead to a greater spread in prices between cheaper and higher-priced cigarettes. This, in turn, leads to greater potential for switching to cheaper cigarettes when excise rates are increased. Keeping all low-priced cigarette on a specific regime is therefore key to the success of the proposed tax change.
Ad valorem rates may encourage price wars, as the government shares in any price reduction. [15] In contrast, when the rate is specific, the amount of excise paid is not reduced when prices are cut. [16]
Specific excises are also easier to administer because it is only necessary to determine the physical quantity of the product taxed, and not necessary to determine its value. [17]
International experience suggests that ad valorem taxes may keep pace with inflation better than specific taxes, even specific taxes that are adjusted fairly frequently, and because of this, some experts favor ad valorem excises. To avoid this problem, specific excises should be adjusted each year automatically (i.e., by an administrative order, which does not require a decision by an executive agency or approval by a legislative body).
Pernicious effect of the second tier
Since the three-tier scheme was adopted in 2001, there have been annual adjustments, except in 2003 when inflation was quite low, to the first-tier specific rate and in the price brackets between the tiers (Table 4). In 2002, the large real increase in the specific rate and the bracket between the first and second tiers lowered the tax on mid-priced cigarettes, as explained further below. Since then, the annual adjustments until 2008 have lagged the increase in the CPI, which has reduced the inflation-adjusted tax on low-priced cigarettes. In addition, the tax on mid-priced cigarettes continued to fall in nominal (and inflation-adjusted) terms.
Table 4. Annual adjustments of the specific excise rate and brackets
Date of Adjustment
Prior Fiscal Year Increase in CPI
(In Percent)
Increase in the First-Tier Specific Rate
(In Percent)
Increase in Bracket between First and Second Tiers
(In Percent)
Increase in Bracket between the Second and Third Tiers
(In Percent)
June 2002
3.6
18.6
18.6
–
June 2003
1.9
–
–
–
June 2004
8.5
8.1
8.1
20.0
July 2005
8.7
7.9
7.9
8.3
June 2006
7.6
7.3
7.5
7.7
June 2007
7.0
6.5
6.5
7.1
June 2008
12.3
13.1
13.1
6.7
This approach to annually adjusting the excise schedule has the pernicious effect of reducing the tax on cigarettes in the mid-price range. This can be seen by comparing the excise tax per pack for 2007 and 2008 (Figure 4). When the bracket between the first and second tiers was increased to PKR 14.86, the 69 percent incremental rate applies to a smaller portion of the retail price. Therefore, the excise on cigarettes priced between PKR 14.86 and PKR 32.00 per pack was reduced. For example, the excise on Capstan, with a retail price before VAT of PKR 27.21 per pack, fell from PKR 15.31 to PKR 14.86 per pack. [18] There does not appear to be a sound tax policy or health policy reason for increasing the tax on low-priced cigarettes, lowering the tax on mid-price cigarettes, while leaving the tax on high-priced cigarettes unchanged.
Figure 4. Tax per pack of 20 cigarettes, before and after the June 2008 changes to the excise tax on tobacco, with pre-June 2008 prices before VAT
C. A Way Forward
Proposed excise rates
To reduce consumption, increase government revenue, and simplify the excise regime, Pakistan should return to a two-tier regime similar to what was abandoned in 2001. The specific excise would be increased to PKR 15.00 per pack of 20 cigarettes and the price bracket between the first and second tiers would be increased to PKR 28.00. [19] For cigarettes in the second tier, the excise tax would be 63 percent of the retail price before VAT. Going forward, the specific rate and the price bracket between the first and second tiers would be automatically indexed for inflation. [20] Under this proposal, over 80 percent of all cigarettes would be subject to the specific excise. Only the higher-priced cigarettes would be subject to the 63 percent ad valorem excise (Figure 5), allowing the government to tap some of the up-market value.
Figure 5. Tax per pack in current and proposed tax regime for tobacco excise
Administrative reforms
As excise tax increases, some consumers will switch to non duty paid illicit cigarettes, most of which are manufactured domestically. Therefore, a strengthened tax administration is essential and it should accompany the reform program. The Federal Excise Act gives the FBR adequate powers to assess and collect excise taxes. However, the critical factor-political will to allow inspectors, with appropriate protection for their safety, to access and/or find suspected sites of illicit manufacturing-appears to be lacking. [21] In this respect, fully implementing the array of measures already included in the Federal Excise Act will be important to reap the full benefits of the tax increase, although scenario analyses in the appendices show that the effect of the proposed tax change on government revenue is robust to increased smuggling.
D. Effects of the Proposal
The proposal increases cigarette prices, reduces consumption, and increases government revenue.
Price effect
The incidence of excises and other indirect taxes is generally assumed to be shifted forward to consumers. Manufacturers will raise their prices to cover any increase in excises. Of course, manufacturers may increase prices by more than the tax increase [22] or less than the tax increase depending on competitive factors, and this possibility is discussed further in Appendix 1. The initial assumption is that prices will increase to fully pass through the tax increase.
Table 5. Current price per pack and estimated new price per pack under proposed tax regime, assuming full pass-through of the tax increase to consumers*
Current pre-VAT price (PKR)
New pre-VAT price (PKR)
% Change
Current excise tax per pack (PKR)
New excise tax per pack (PKR)
Embassy
14.86
23.40
57.5%
6.34
15.00
Morven
15.86
23.80
50.1%
7.03
15.00
Gold Flake
15.86
23.80
50.1%
7.03
15.00
Capstan
29.56
35.20
19.1%
16.48
22.18
Gold Leaf
42.24
42.24
0.0%
26.61
26.61
Other brands
NA
23.40
NA
6.34
15.00
* The assumption of full pass-through implies that tobacco manufacturers increase prices to preserve their pre-tax revenues per pack.
Some will argue that the excise on low-priced cigarettes must be kept low to protect the low-income consumers from spending more on tobacco. However, because the prevalence rate and ensuing burden of tobacco use is higher among low-income consumers and because these consumers are more sensitive to price, low-income consumers reap maximum benefit from higher taxes through reduced consumption. Savings are therefore generated not only through lower expenditures on tobacco itself but also on related conditions (e.g., hospitalization for cancer) and higher productivity. In addition, many countries also help low-income tobacco users through increased support to cessation programs and mass awareness campaigns that are often funded by higher taxes. In this regards, it is clear that governments have more effective ways of helping low-income consumers than providing cheap tobacco products.
Although the proposal would result in a sharp increase in the price of cigarettes at the lower end of the market, cigarette prices would nevertheless remain significantly under the level of most countries in the world (Figure 6), and most notably well under the price of popular brands in India.
Figure 6. Price of a pack of 20 cigarettes in various countries at purchasing power parity *,+
Source: WHO. Global Report on the tobacco Epidemic, 2008. The MPOWER package. World Health Organization. 2008 < http://www.who.int/tobacco/mpower/en/ >
* All prices are converted to US dollars and adjusted for differences in affordability across countries, hence very high figures for India, for example.
+ All figures are based on 2006 data, except for “Pakistan (after tax increase)”, which is based on a price of PKR 23.80, the price of Gold Flake under the proposed tax change.
Consumption effect
Raising the price of cigarettes relative to other products will encourage consumers to reduce their purchases of cigarettes. It may also encourage consumers to substitute non duty paid illicit cigarettes for duty paid cigarettes. How much consumption is reduced depends on the elasticity of demand, [23] which in low- and middle income countries varies widely, but is generally assumed to be around -0.8. [24] However, there are many reasons to believe that the elasticity of demand is very low in Pakistan. First, tobacco prices are low: a pack of Gold Flake costs PKR 114 in India and only PKR 18.40 in Pakistan (using the current exchange rate). [25] Second, the proposed price increase is significant and using a standard point elasticity is likely to overestimate the change in consumption in such a context. Last, comparable countries such as Egypt have price elasticities of around -0.4 or even lower. [26] For these reasons, Table 6 provides estimated changes in consumption based on an elasticity of -0.4. Appendix 2 assesses the impact of changing the elasticity and of increased illicit consumption on these estimates. [27]
Table 6. Impact of proposed tax regime on sales of cigarettes*
Forecasted sales for 2008/09 under current tax regime
(million packs of 20 cig.)+
Estimated sales for 2008/09 under proposed tax regime
(million packs of 20 cig.)
% Change
Embassy
248
191
-23.0%
Morven
1,395
1,115
-20.0%
Gold Flake
1,094
875
-20.0%
Capstan
289
267
-7.6%
Gold Leaf
349
349
0.0%
Other brands
334
257
-23.0%
Total
3,709
3,055
-17.6%
* Assuming 5% growth from the 2007/08 production figures and a -0.4 price elasticity of demand.
+ Source: Pakistan Economic Survey (production) and Tobacco Merchant’s Association (market shares for 2006), authors’ calculation.
Revenue effect
Increasing excises on cigarettes would increase government excise revenue by almost 50%, compared to what would be collected under the current tax regime. [28] Most of the increase is generated by brands at the low-end of the market, because changes in tax per pack mostly occur at that level (Figure 5). This increase in revenue would raise the share of tobacco taxes in the GDP to 0.45%, the same level as in 1993-94, up from 0.28% in 2007-08. [29]
Table 7. Impact of proposed tax regime on excise tax revenue from cigarettes
Forecasted revenue from tobacco excise tax for 2008/09 under current tax regime (million PKR)
Estimated revenue from tobacco excise tax for 2008/09 under proposed tax regime (million PKR)
% Change
Embassy
1,575
2,871
82.2%
Morven
9,804
16,729
70.6%
Gold Flake
7,692
13,125
70.6%
Capstan
4,768
5,926
24.3%
Gold Leaf
9,278
9,272
-0.1%
Other brands
2,116
3,856
82.2%
Total
35,233
51,779
47.0%
E. Conclusion
A strong case can be made for increasing excises on cigarettes. First, cigarettes are inexpensive-the most popular brands cost PKR 18.40 per pack of 20 (USD 0.25). Second, per capita cigarette consumption has been growing, raising significant health concerns. Third, the current three-tier regime for excising cigarettes is complex and pernicious. The government’s annual adjustment to the rates and brackets increases the excise payable on the low-priced brands but reduces the excise payable on mid-priced brands while leaving the excise payable on high-priced brands unchanged. There is neither a sound health policy reason nor a tax policy reason for this pattern of changes.
Pakistan should return to a two-tier regime similar to what was abandoned in 2001. The specific excise would be increased to PKR 15.00 per pack of 20 cigarettes and the price bracket between the first and second tiers would be increased to PKR 28.00. For cigarettes in the second tier, the excise tax would be 63 percent of the retail price before VAT. Going forward, the specific rate and the bracket between the first and second tiers would be automatically indexed for inflation.
Assuming the excise tax is fully passed through to consumers, adoption of this proposal will lead to a 50 percent increase in the price of the most popular brands. Consumption of cigarettes will decline by 18 percent, providing significant health benefits, and the government’s revenue from cigarette excises will increase by 47 percent. The forecasted impact of the proposed change is robust to the assumptions used in the model regarding the pass through to consumers of the tax increase, as well as elasticity and the potential impact of smuggling, as demonstrated in Appendices 1 and 2.
Appendix 1: Sensitivity analysis for pass-through of the tax increase to consumers
How much of the new tax will be passed through to consumers by the tobacco manufacturers will determine the new market prices and therefore consumption levels, hence an impact on government revenue. The proposal assumes pass-through of 1, i.e., the entire tax increase is passed through to consumers in the form of higher prices. In this appendix, five more pass-through scenarios are assessed. It is first assumed that manufacturers cannot pass the entire tax increase to consumers, hence pass-through of 0.75 and 0.90. Next, it is assumed that manufacturers pass-through more than the tax increase, as was the case with Capstan in 2008. Three more pass-through are therefore tested: 1.10, 1.25, and 1.40. The impact on government revenue and consumption is calculated in Table A1.1
Table A1.1 Impact on consumption and government revenue of various pass-through scenarios*
Pass-through
Impact on consumption (%)
Increase in government revenue
from excise on cigarettes (%)
0.75
-13.2
53.4
0.90
-15.9
49.6
1.00
-17.6
47.0
1.10
-19.4
44.4
1.25
-22.1
40.5
1.40
-24.8
36.6
* The base case scenario is highlighted.
The impact of the pass-through rate on consumption is quite limited, with a difference of 10 percentage points between the two extreme scenarios. The increase in government revenue also is not very sensitive to higher pass-through rate. The same applies to a less than unity pass-through rate, as the smaller reduction in price results in a smaller reduction in consumption than in the base case. The proposed tax structure is thus remarkably robust to manufacturers’ pricing decisions.
Appendix 2 Sensitivity analysis for price elasticity and illicit production
The estimated impact of this tax proposal depends on some key assumptions related to the price elasticity of demand and the proportion of consumers who might switch to illicit cigarettes. In this appendix, the sensitivity of results is assessed by calculating the change in consumption and government revenues under six scenarios of illicit trade and five scenarios of elasticity.
In the case of illicit trade, it is assumed that the decrease in consumption is augmented by respectively 0, 10, 15, 20, 25, and 30 percent of the change without the illicit trade, signalling the additional consumers “opting out” of the legal market after the increase. For price elasticities, tested scenarios are -0.35, -0.40, -0.50, -0.60, and -0.8. All results are combined and synthesized in the following two tables, where the percent increase in government revenue (Table A2.1) and the percent decrease in cigarette consumption (Table A2.2) are provided under joint scenarios of price elasticity and illicit trade. The base case scenarios used in the text of the report are highlighted in order to provide a benchmark for comparison.
Table A2.1: The impact on government revenue of the proposed tax change, following various scenarios of illicit trade and price elasticities* (in percent)
Additional decrease in taxed consumption due to illicit trade
0%
10%
15%
20%
25%
30%
Price elasticity of demand
-0.35
50.5
48.0
46.8
45.5
44.3
43.1
-0.40
47.0
44.1
42.7
41.3
39.9
38.5
-0.50
39.9
36.4
34.6
32.8
31.0
29.3
-0.60
32.8
28.6
26.4
24.3
22.2
20.1
-0-80
18.7
13.0
10.2
7.3
4.5
1.7
* The base case scenario is highlighted.
Table A2.2: The impact on taxed consumption of the proposed tax change, following various scenarios of illicit trade and price elasticities* (in percent)
Additional decrease in taxed cigarette consumption due to illicit trade
0%
10%
15%
20%
25%
30%
Price elasticity of demand
-0.35
-15.4
-17.0
-17.7
-18.5
-19.3
-20.1
-0.40
-17.6
-19.4
-20.3
-21.2
-22.0
-22.9
-0.50
-22.0
-24.3
-25.4
-26.5
-27.6
-28.7
-0.60
-26.5
-29.1
-30.4
-31.7
-33.1
-34.4
-0.80
-35.3
-38.8
-40.6
-42.3
-44.1
-45.9
* The base case scenario is highlighted.
The main driver of impact is the assumed price elasticity of demand and not the potential increase in illicit trade. Even the extreme scenario that assumes an elasticity of -0.80 and an additional 30 percent illicit trade, the proposal generates a slight increase in revenue. Extreme scenarios, however, bring about very significant changes in legal consumption, and therefore call for enhanced administrative measures in order to limit illicit production.
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