Cigarettes the most taxed business

The cigarette manufacturing industry is the only sector in the economy covered by a law that forces increases in the excise tax every two years from 2009 to 2013.

Figures obtained from the Bureau of Internal Revenue show that the increases did not exactly produce the expected revenues commensurate in amounts to the rate of the taxes.

This is so, according to industry leaders, because every time a new higher rate is imposed, there is an initial tendency for the market to slow down on consumption.

This year until 2013 is the last of the every-two-year increase.

But long before the period ends, there are already six different proposals in the House of Representatives to again raise the rate on the so-called “sin product.”

One proposal, that of Batangas Rep. Hermilando Mandanas, states that “despite the five-time adjustments in the specific tax rates since 1997, these changes in excise tax rates are deemed insufficient to recover the loss of value due to inflation.”

Every time the specific tax is raised, there is a corresponding – though temporary – market resistance. Yet the collections tend to go up, certainly not because of higher consumption but simply as a function of the new higher burden.

Cigarettes are classified into low, medium and high. In 2009 the tax on the low classification was P2.49 per pack. That represented a 10.76 per cent increase. Consequently, sales dropped to 8.61 per cent for a value of P2.205 billion.

In the medium category, the rate of P7.14 per pack was raised by 5.95 per cent. Sales were recorded at P648.979 million.

In the high category, the tax for 2009 was 11.43 per pack. This rate was 5.06 per cent higher than the previous year. Sales came to P1.510 billion.

All told, the three categories produced a total excise tax of P82.039 billion from 2007 to the current year. What appear to be higher collections did not result from higher demand.

The heavier tax burden raised total collections. The declines were considered minimal but the collections during those years were higher because of the higher tax.

This reality appears to sit squarely with the special report of the International Tax and Investment Center and Oxford Planning which said “(while) the ITIC acknowledges that the objectives of tobacco excise taxation are to raise revenues and address externalities related to consumption, we dispute the conclusion of the World Bank and the World Health Organization that ‘tax increases are the single most effective intervention to reduce demands for tobacco.’”

The ITIC study pointed out that “substantial continuous real increase in taxation on tobacco products is to encourage consumers to switch from legitimate – meaning tax paid – sources to contraband tobacco.” The ITIC went on to say: “The effect on overall tobacco consumption and more importantly, smoking incidence, is likely to be modest. But by stimulating greater illegal activity, higher taxes would undermine the quality of products entering the market, encourage a culture of tax evasion and crime, deter investment in developing markets by international companies and weaken the tax base.”

This space saw the situation with his own eyes last year in New York City where a pack of Marlboro Lights retails for $11. The border to New Jersey is closely watched because smokers were smuggling in cigarettes from Virginia bought retail at less than $3 to the pack.

There are Filipinos who dare bring boxes of cigarettes to Manhattan in New York City and bootleg them for $3-$4 dollars a pack. The cigarettes are bought here for about P50 or $1.16 a pack based on the current exchange rate.

In the Philippines the patent abuses are committed by Duty Free Philippines. Imported, untaxed cigarettes with markings “duty free and not for resale” are available nearly everywhere but they are supposed to be sold only in specified duty free shops.

They are made mostly in Switzerland and sell cheap at P1.20 per pack compared to P50 for the locally-manufacture brand.

The conclusion of the ITIC is “by international standards, cigarettes are currently taxed very heavily relative to consumer purchasing power in Asean countries.”


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