Are Air Conditioners A Luxury That Needs To Be Taxed?

If someone asked this question a few decades ago, the answer could be somewhat in affirmation. However, today’s scenario is quite different. Air conditioners that were once considered a luxury accessory to be afforded by the elite class only and were made available only by a handful of companies in Pakistan have now arguably earned the status of a necessity.

With the increase in competition, air conditioner prices have slashed down considerably, making them more affordable for a wider range of income brackets. That is the prime reason why today we see air-conditioners installed in almost every office building from government to private as well as in the majority of households. Also, technological advancement has allowed manufacturers to introduce more energy efficient air conditioners at lower prices.

Today people from a vast majority of income segments own an air conditioner and it has also become a necessary investment in fundamental institutions like private and government offices, schools, hospitals and even super markets.

From an economic perspective, air conditioning is important for productivity enhancement of employees, better efficiency at manufacturing facilities and is integral to the maintenance of business support systems such as computers and other machinery. Before air conditioning, cotton threads broke, cigarette machines jammed, bread grew mold, film attracted dust, pasta lost its shape, and chocolate turned gray when temperatures and humidity fluctuated. By filtering air and stabilizing temperature and humidity, mechanical systems improved the environment for products as well as workers. Today many consumer products such as computer chips and CDs must be manufactured in ‘clean rooms’, which provide a pristine dust-free environment. It can be safely asserted that air conditioning plays a major role in running efficiently the wheel of the economy.

With the challenges that await Pakistan’s economy, the increasing affordability of air conditioners is certainly a blessing for the masses and corporate sector. The double digit inflation that the Pakistani economy has undergone recently has made a large variety of products more expensive for the citizens. It seems like a few items that had not been highly impacted by the inflation earlier are now likely to suffer the ill-fate of becoming more expensive as the authorities plan to categorize air conditioners as luxury and levy 10% excise tax on them. If implemented, the result of this decision is likely to be more denting to the entire economy rather than beneficial. Since air conditioners have become a considerably critical tool for greater productivity, the demand for air conditioners is not likely to reduce as the authorities expect. Instead people will increasingly rely on the grey market to fulfill their air conditioning needs. And if this trend takes up, it will work as a double-edged sword for the government, because on one hand it will promote the illegal channel and on the other hand the government will not attain the tax revenue target that it aims to generate because grey markets evade taxes.

If, on the other hand, the government’s objective is to curtail the energy crisis rampant in our country, the  focus should be on providing technological solutions rather than imposing duties and aiming to reduce the demand of air conditioners. If that is the case and air conditioners are such a luxury as stated by authorities, then the authorities should ensure that the air conditioning facility is first taken away from the government offices. But obviously that is not on the cards because that is not the real solution to either curtailing the ongoing energy crisis or improving tax revenue. To achieve energy efficiency, it would be far more beneficial if the government encourages the use of inverter air conditioning. Inverter air conditioners continuously regulate temperature and are at least 30% – 50% cheaper to run as they consume less electricity. These air conditioning systems vary the speed of their compressor by delivering precise cooling and heating power as required.

As mentioned earlier, imposing tax on air conditioners will not affect the demand of air conditioners because consumers will easily find cheaper alternatives from the grey market. Both consumers and the government suffers from this situation. On one hand, consumers have no choice but to purchase a product with no warranty and reliability and on the other hand, the government is deprived of import duties. Moreover, there is a situation of trade deficit that must be controlled as local manufacturers are forcefully shut down, hampering the country’s export base. Taking the air conditioning facility away will only make the manufacturing environment more hostile.

The citizens of Pakistan, the corporate sector and invariably the manufacturers of air conditioners will only benefit if the government supports genuine local manufacturers and exempts them from unnecessary duties. A more appropriate way to generate tax revenue and save energy for the government is to levy duty on products that are actually luxury items and are being consumed by the elite income group and on the other hand create awareness among the masses regarding the ways and benefits of power saving in everyday lives. Air conditioners must remain tax free to create a win-win situation for all concerned stakeholders.