By Faraz Khalid, World Health Organization, Regional Office for Eastern Mediterranean, and Wajeeha Raza, Agha Khan University, Pakistan
On 4 December 2018, the Federal Minister of National Health Services in Pakistan announced the plan to introduce a ‘sin’ tax, or more appropriately, public health tax, on tobacco products and sugary beverages. It was expected that this tax would be part of the mini-budget/economic reforms package announced on January 23, 2019 by the Minister of Finance, however that did not materialize. While the proposal for the sin tax is reportedly currently under consideration of the federal Cabinet, it is important to learn from the experiences of other low- and middle-income countries that have implemented this tax to comprehend its potential utility and to ensure maximum effectiveness.
Public health taxes have recently become a popular intervention for lower middle income countries (LMICs) like Pakistan, as they have a dual benefit of reducing consumption of harmful products and increasing the revenue collected for health. In fact, a public health tax is included in the Disease Control Priorities list of most cost-effective health interventions for LMICs. If we look at evidence for its impact on consumption, tobacco taxation has decreased tobacco consumption by 40% in South Africa and the sugar tax in Mexico has reduced sugary beverage sales by 5% in the first year and 10% in the second year. On the revenue generation front, a public health tax has helped the Philippines nearly double its revenue for health in its first year alone.
Critics of the tax have complained about its regressive nature, however research on sin taxes has proven that any regressive impacts of the tax are offset by the economic health benefits of the taxation to lower income groups. These economic health benefits of reduced consumption can be maximized if the tax is combined with health promotion activities. So far, this form of taxation has been implemented in over 40 countries, with many reviews showing successful outcomes.
Since the announcement of a sin tax in Pakistan, various news reports have detailed the tax to be Rs. 10 (0.07 USD) on tobacco products and Rs. 1/Rs. 2 (0.007 – 0.014 USD) per 250ml of sugary drinks. It is expected that the government will raise around 75 billion rupees (539 million USD) each year with this tax. News reports have stated that this additional revenue will be used to scale up social health protection programs and expand coverage for additional illnesses, but this is still to be endorsed by Ministry of Finance. Currently, the Government of Pakistan spends 0.8% of the total GDP on health (only 3.9% of Pakistan’s total government expenditure), making Pakistan one of the lowest spenders on health in LMICs globally. This underfunding of health and low fiscal space are important reasons for why the potential additional revenue from this tax, which could increase government spending on health to 1% of GDP and 5% of total government spending at the national level, could be a landmark initiative for healthcare in Pakistan. Some features of the current proposal are positive and should be maintained.
Evidence from LMICs shows that public support is a key feature in the success of a public health tax, and several components of the current proposal have been shown to help increase public support. For instance, the flat rate in the current proposal can be useful in generating support for the tax. Some countries have experimented with more complicated tiered forms of taxation, and in contrast, a flat rate makes it easy for stakeholders such as law makers, industries and the public to understand and support the tax. A second positive feature is that the proposals suggest a clear usage for the tax. Various reports have stated that this tax will be used for scaling up the health insurance and social protection program, similar to the value-added tax on goods and services in Ghana. This again has shown to be useful to build public support for the taxation, because it gives people a specific cause to support. Thirdly, the plan to expand health insurance is aligned with the promises and goals of the ruling government. This can help build trust in the government for the tax which will be critical in converting the tax proposal to law.
However, there’s still much to be learnt on the challenges of implementing such legislation from the experience of other low- and middle-income countries like the Philippines and Ghana.
Evidence from other countries shows that there may be significant pushback from industry. For instance, when the Philippines introduced the sin tax, there was significant resistance from the tobacco industries, which meant that the law was only passed by a small 10-9 majority. Tobacco farmers in the province of Khyber Pakhtunkhwa in Pakistan are already protesting this move as it will be the third tax imposed on tobacco products this year. Pakistan will need to carefully manage the resistance it will undoubtedly face by tobacco and soft drink industries. The Philippines for instance provided a portion of the revenue to tobacco farmers and Morroco changed the tax from a flat VAT to a tax on the sugar content following pushback from industry.
A second area of concern is the amount of taxation. Tobacco products have a relatively inelastic demand, and a sin tax must be large enough to impact consumption. For instance, research from the sin tax on alcohol from South Korea shows no decrease in consumption. It is unclear whether the government has undertaken an evaluation of the price elasticity of demand for tobacco or sugary drinks to determine the amount for the tax, but on the outset, the tax, especially on sugary drinks (Rs. 1/Rs. 2 or 0.007/0.014 USD), may not be large enough to create any significant impact on consumption.
Another challenge observed in other areas like the Gulf Cooperation Council is that the impact may be offset by substitution to illicit companies. This can be a serious concern for the sin tax on tobacco in Pakistan, as some news reports suggest that the illicit market may be as large as 33%. Additionally, the government should also be careful when using this tax for planning purposes. Evidence from Thailand and Philippines shows that the revenue can be volatile, and has decreased over time in some cases. Learning from their experience, the government of Pakistan should account for potential changes in revenue in the long term while planning for the tax and its usage.
According to the national health vision, Pakistan aims to increase its governmental spending on health from the current 0.8% to 3% of GDP, and a sin tax will likely be an important step in this achieving this goal. However, to ensure maximum impact of the tax, it is essential to take into account the learnings from other countries that have used this tax.