By ANGELA CELIS
There will be an “explosion of black market cigarets “ in the Philippines should the government choose to implement the House-approved version of the sin tax proposal which seeks to raise excise taxes for cigarets by as much as 708 percent, the Philippine Tobacco Institute said.
During the Senate Committee of Ways and Means excise tax hearing last week, the PTI said that a sharp increase in excise taxes for cigaret products will increase the presence of smuggled or counterfeit cigarets in the country.
Lawyer Carmen Herce, manager of Philip Morris Fortune Tobacco Corp. (PMFTC), made a presentation during the Senate hearing to explain the position of the tobacco industry on the government’s plan to raise excise taxes.
Herce said that there are already two brands of black market cigarets in the country called Harvey and Chelsea, which are being sold in Mindanao at a price of P4.50 to P7.50 per pack, lower than the price of the cheapest legitimate cigarets, which are being sold at P10 to P12 per pack.
“While it is only concentrated in Mindanao, we fear that it will also be sold in other parts of the country should House Bill 5727 be implemented,” Herce said.
House Bill 5727 is the amended version of the original excise tax proposal authored by Cavite Rep. Joseph Emilio Abaya.
It is proposing a two-tiered system, as against the unitary tax system suggested under the original version of the bill. It also calls for an eight percent increase in the excise tax rates every two years, from January 1, 2015 until January 1, 2025.
Should the House-approved version become law, the tax rate for low-priced cigarets, which is currently pegged at P2.72 per pack but rises progressively, will increase to P12 in 2013 and P22 in 2014.
The mid-priced brands and high-priced brands which have tax rates of P7.56 and P12 respectively will be paying P28.30 in taxes in 2013 and P30 in 2014.
The premium brands already pay P28.30 per pack under the current system, and will have the same rate in 2013 and P30 in 2014 under the amended version of the Abaya bill.
By 2014, the increase in excise taxes for low-priced cigarets will be 708 percent, 297 percent for mid-priced cigarets, 150 percent for high-priced brands, and 6 percent from premium brands.
Herce said that the tobacco industry is questioning the House-approved version’s excise tax proposal which seeks to raise excise tax rates for cigarets close to the current tax level of premium brands.
“The market share of the premium segment is negligible at 0.10 percent, and its revenue share is also around 0.10 percent. If the government wants to optimize its desire to collect more revenues, it should take into consideration the segment which makes the most contribution to taxes which is the low-priced brands,” Herce said, adding that the low-priced segment accounts for 65 percent of the total market.
“If we look at the 708 percent increase and compare it with the excise tax increase in other countries, it will be the biggest in Asia. The highest increase so far was implemented in Brunei which hiked its excise tax rates by 360 percent in 2010,” Herce said.
Herce said that if the government pushes through with the House-approved bill, the volume of legitimate cigarets in the market is expected to drop to 49.1 billion sticks, from the current level of 100.5 billion sticks.
“If you adopt the elasticity of 0.87 which is based on a UP study, the drop in volume will be 51 percent or 51.4 billion sticks. That’s around half the current number,” she said.
Herce said that the drop in the volume of legitimate cigarets does not mean that people will stop smoking, since smokers could shift to smuggled or counterfeit cigarets sold at cheaper prices because they are not taxed.
“Our conservative estimates show that the illicit trade incidence will rise to 34 percent, which translates to around 25.7 billion sticks,” she said.
Herce said that this figure is based on the 51.4 billion sticks of legitimate cigarets that will be lost should there be a sudden increase in excise taxes. Of the said figure, 50 percent is expected to be replaced by illicit cigarets.
Herce cited the experience of Malaysia when it decided to raise excise taxes. She said that consumers merely shifted to cheaper alternative tobacco substitutes.
“In Malaysia, excise taxes increased by 365 percent from 2001 to 2009. This led to a 44 percent drop in the volume of legitimate cigarets, and 150 percent increase in illicit trade,” Herce said.
“In Brunei, the excise tax rate was raised by 360 percent. In less than one year, the drop in legitimate volume and the increase in illicit trade was 80.4 percent. The drop in legitimate volume was offset by the increase in illicit cigarets,” she said.
Citing the World Customs Organization, Herce said that cigaret smuggling remains a global problem which continues to increase despite the government’s enforcement strategies.
“The threat of illicit trade is recognized as a global problem. Even international government agencies would like to warn us of the adverse effects if we significantly increase taxes on cigarets,” she said.
Herce also explained her company’s research shows that the black market cigarets may be the work of terrorists who are trying to generate more revenues to fund their terrorist activities.
“It was discovered by enforcement agencies, and it is a worrying trend worldwide. Since black market cigarets is (a) very high profit (activity) and (is a) low risk method of raising revenues, it is also being used to fund terrorist activities,” she said.
Herce added that the health objective of the government to curb smoking might even be impaired since smokers will turn to cheaper and illegal alternatives.
“These black market cigarets have no health warnings, unlike legitimate cigarets which comply with the government’s regulations when it comes to issuing health warnings,” she said.
Meanwhile, Herce said that the volume of tobacco leaf used for domestic production will also drop with the Abaya bill in place to 17.7 million kilograms from the current level of 36.2 million kilograms.
“The affected farm area will be around 10,300 hectares, a 25 percent drop because the current land area used to plant tobacco is around 38,000 hectares. Almost 25 per cent of the land used for planting tobacco will be affected,” she said.
Herce said that around 40 percent of tobacco farmers and their dependents will lose their means of livelihood. There are nearly three million Filipinos who are currently employed by the tobacco industry.
“There will be adverse consequences if the government decides to implement HB 5727. There will be a massive contraction in the volume of legitimate cigarets, which are paying taxes. In turn, there will be a drop in the purchase of local tobacco leaf, there will a sharp increase in illicit trade, and there will also be an effect on unemployment,” Herce said.
Herce said that while the tobacco industry is against the tax increases proposed under the original and amended versions of the Abaya bill, they are still open to tax hikes as long as they are reasonable and moderate.
“We are not saying that the tax rates of cigarets should not be increased. We recognize that there is a need for the government to raise revenues to fund its various projects and we also recognize that there is an underlying health objective behind the revenue measure,” Herce said.
“What the industry is proposing is that any increase should be reasonable so that it will not result in any unintended consequences, such as the rise of illicit trade in cigarets,” she said.
During the Senate hearing, Herce presented an excise tax proposal agreed upon by PMFTC, Associated Anglo-American Tobacco Corp, and Japan Tobacco International.
“We are proposing a three-tiered system, down from the current four-tier structure. Maybe the cigarets in the premium level can be brought down to the same level of the high-priced brands since there is no volume in the premium segment,” Herce said.
“As to how the government will do that, we leave it up to the wisdom of the legislators. There should be moderate tax increases, and we favor this,” she said.
The tobacco industry proposes that the tax rate for the high-priced brands be raised to P12.50 next year from P12 this year; to P8.50 from P7.56 for mid-priced brands; and to P3.30 from P2.72 for the low-priced segment.
“We also propose that for every two years, there will be specific increases instead of percentage increases,” she said.
Herce said that under their proposal, the cigaret industry will generate incremental revenues of P7 billion on the first year of its implementation.
“We believe that by providing reasonable and moderate tax increases, the government can optimize its revenue collection without bringing about unintended consequences,” Herce said.
Senate President Juan Ponce Enrile countered Bureau of Internal Revenue Commissioner Kim Henares’ position on cigaret smuggling.
“I’m talking from experience. Read your tax history in this country. If you’re going to push everything up, I assure you, this whole country, you cannot police it, (even) if you employ the entire Armed Forces of the Philippines and Philippine Navy to prevent smuggling. You’ll have the entire southern border of the Philippines as a veritable, busy corridor for smuggled cigarets,” Enrile said.
“You will not collect what you are trying to collect. Yes, we are going to help the government. These industries have an obligation to contribute to the revenue of the government. But let us do it in a manner that will not create side effects or problems in the country,” Enrile said.
“If you’re going to (have) a very harsh system, you might end up having nothing. The power to tax is the power to destroy, but it is also the power to keep alive the government. Don’t destroy the goose that lays your golden egg. Find a happy medium, acceptable to the taxpayers and your consuming public, because if nobody will consume the product, what kind of revenue do you get?”
Senator Ralph Recto, the chairman of the Senate Committee on Ways and Means, also asked the Department of Finance to provide the computation as to how it was able to derive the P60 billion incremental revenues that is expected to be generated under the original Abaya bill.
The original estimate of P60 billion, was cut to P33 billion with tobacco required to shoulder the biggest burden of P27.
“Not only are we questioning the incremental revenues, but including putting in jeopardy what we are already collecting. So if you do have the computations, please submit it to the committee,” Recto said.
“Revenues are important, you don’t want to destroy it, or else there’s nothing to spend for health, for the displaced workers or displaced farmers,” he said.
Meanwhile, the Department of Finance said that the proposed hike in cigaret taxes does not mean that that there will be smuggling of counterfeit cigarets.
“Cigaret and alcohol prices in the Philippines are so low that even with increase in taxes, we will still not exceed those of our neighbors and thus will not significantly cause a surge in illicit trade,” Finance Assistant Secretary Ma. Teresa Habitan earlier said.
Habitan said, citing the World Health Organization, that the root cause of smuggling is not the price of the products, but “the lack of government commitment, corruption, and poor law enforcement.”
She also cited a study made by the World Bank and said that except for a few rare cases, countries which have significantly increased tobacco taxes and prices have experienced a reduction in tobacco consumption and higher tax revenues, “with little or no perceived change in smuggling.”
“Countries that are more transparent curbed smuggling regardless of the price and tax increases,” Habitan said, citing the World Bank as source.
Henares also cited the World Bank study during the Senate hearing.
“There’s a World Bank study that shows that smuggling is not directly related to the price. It is directly related to corruption and to governance,” she said.
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