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A new term, 'Sin Tax', is being introduced into the lexicon of taxation in Pakistan. On December 4, federal minister for National Health Services, Aamer Mehmood Kiani, announced that a 'Sin Tax' will be imposed soon on cigarettes and sugary beverages, as the PTI government is committed to increasing the health budget by five percent of GDP and needed funds. "Various routes will be used to increase the health budget," he stated, "and one of them is imposing a sin tax on tobacco products and sugary beverages. That sum will be diverted to the health budget."

While the term 'Sin Tax' may be in use commonly in many Western countries, as an informal reference to tax on certain specific products or pursuits, the prudence of using this term in Pakistan is questionable; for the simple reason that in Western countries, the word 'sin' in this context is not used in the strict religious sense, but in a broader reference to goods or services considered harmful for health or social harmony.

On the other hand, in our society, the word 'sin' invariably has a strictly religious interpretation, and if a Sin Tax is imposed on any product or service, some of the populace at least, is bound to start believing that consumption of that product is actually a real sin in religious terms! This absurdity can get more magnified when this proposed new tax is talked about in the vernacular as gunah tax, as the word gunah leaves no doubt in its condemnation of an action as being against the religion. Already at a meeting at the Press Club in Peshawar a few days ago, a tobacco farmers' spokesperson declared that the very idea of a gunah tax is highly insulting for the deeply conservative and religious tobacco farmers of KPK.

So what exactly is a Sin Tax and why is it imposed? To start with, Sin Tax is not a technical term in economics, but a colloquialism for an excise tax. And an excise tax itself is an additional tax imposed on some and not all goods, in addition to the sales tax or the general sales tax (GST) which is charged on the sale of almost all goods and services. The paramount rationale of a Sin Tax in the West is not to collect additional revenue, but to discourage consumption of certain goods and services considered potentially harmful or undesirable if consumed too freely, by making these goods or services more expensive with the additional sin tax (excise tax) added to the retail price. As such Western governments have imposed the sin tax on goods such as tobacco, alcohol, legalized gambling, and even pornography. Note well these items are being additionally taxed not because they are a sin per se, or are illegal. It is just regarded advisable to limit their use.

The logic that a Sin Tax will necessarily generate huge additional revenue is a fallacy for several reasons. Logically, if a product becomes more expensive (with sin tax added), then consumption of that product will fall if the demand for that product is elastic, as in the case of carbonated soft drinks. And with falling consumption, tax revenue generation will also fall. So the sin tax becomes self-defeating in terms of increasing tax revenues. Further, a sin tax will produce negative impact for the industry, because with falling consumption, the manufacturers may resort to production cuts, resulting possibly in job cuts, less spending with various vendor industries supported directly by their production, creating decrease in income for retailers and so on.

Imposing a Sin Tax on soft drinks industry is also in a sense a punishment for obeying the laws. The industry already pays an excise duty and as said before, the sin tax is nothing else than an excise tax. So instead of going after all those who are not registered and pay no tax of any sort, the government wishes to further squeeze those already paying taxes. Even the argument that tax on 'sugary' drinks is justified from a public health point of view is discriminatory. If there has to be a tax on food and beverage items because of sugar content, then there should be a sin tax on ALL food items containing sugar like bakery products, cakes, biscuits, mithai, etc., which weight to weight contain a much higher percentage of sugar than soft drinks.

For tobacco, one can argue that the demand is relatively inelastic and if a sin tax makes cigarettes more expensive, consumption may not fall and hence the government may actually generate extra revenue through the sin tax. But in our country where spurious and smuggled goods flourish, consumption is likely to shift from duty-paid cigarettes to non-duty-paid cigarettes. Second, and if indeed demand is inelastic for cigarettes, the consumer will spend more on cigarettes after the tax is applied, leaving less money in hand for purchase of perhaps even essential goods for the family.

But aside from these contentions, what is of concern is the government's proclivity, like that of previous governments, to consider imposing more indirect taxes to boost revenues, rather than seriously working for sustainable long-term structural improvements. Indirect taxes like the proposed sin tax are easily borne by the affluent, and the burden really falls on lower income groups. Then, indirect taxes may or may not increase tax revenue, as has been explained earlier. Indirect taxes are also inflationary. They can also lead to reduced production and reduced economy activity, job cuts, tax evasion through collusion with tax collectors and other undesirable outcomes.

Government revenue really needs to be increased through expanding the direct, income tax base, something which no previous government has even seriously attempted to do. Imagine, in a country of over 200 million people, only about 1.4 million people file their income tax returns. The majority are the salaried class whose income tax is deducted at source before their salary is paid. This poor lot with a fixed income per month is then asked to pay all sorts of indirect taxes on everything they consume and including even basic necessities. Is this fair?

So if this government wants to do this country just one big favour, let it go after everyone who earns an income over a certain minimum level but does not pay tax. The indirect sin tax can at best provide only fractional additional revenue. But just imagine if the government goes all out and doubles the amount of direct income tax it is presently collecting! Then there will be no reason why free healthcare and free education cannot be provided to all citizens, besides other necessities of life, most of which are sadly available only to a select few in society today.

(The writer is a specialist in communications and a social commentator. [email protected])

Copyright Business Recorder, 2019


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