Smoke Screen: Estimating the Tax Pass-Through to Cigarette Prices in Pakistan

15 Pages Posted: 9 Dec 2016

See all articles by Serhan Cevik

Serhan Cevik

International Monetary Fund (IMF)

Date Written: August 2016

Abstract

This paper estimates the magnitude and speed of tax pass-through across tobacco products at different price points in Pakistan by using a novel dataset of monthly observations on cigarette prices in 50 cities during the period 2004-2015. The pass-through of cigarette taxes to retail prices is found to occur within two months, but is mostly incomplete in magnitude. On average, a one-rupee tax increase is estimated to lead to an increase of only PRs 0.8 in retail cigarette prices. This is driven by the fact that tobacco manufacturers absorb a significant part of the tax increase. For the premium brand, however, I observe full pass-through, indicating possibilities of different demand elasticities across product tiers. These findings are likely to be attributable to competitive market pressures, especially at the budget end of the price spectrum, possibly stemming from changing consumption patterns with greater awareness of health risks as well as the impact of illicit domestic production.

Keywords: Taxation, Pakistan, Excise taxes, Sales taxes, Tax policy, Consumer prices, Tax collection, Econometric models

Suggested Citation

Cevik, Serhan, Smoke Screen: Estimating the Tax Pass-Through to Cigarette Prices in Pakistan (August 2016). IMF Working Paper No. 16/179, Available at SSRN: https://ssrn.com/abstract=2882617

Serhan Cevik (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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