It ain't broke but needs fixing

One interesting tax measure presently being tackled by the House Ways and Means Committee chaired by Congressman Hermilando I. Mandanas of Batangas is the excise tax on cigarettes. A number of bills have already been filed to change the existing cigarette excise tax structure, and several groups are supporting this initiative to generate more revenues for the government as well as to discourage smoking.

At the same time, opposing legislators filed bills providing for the retention of the present system and extending its life. One of the supporters of the move to retain the present system is the president of Philippine Tobacco Institute (PTI), Rudy Salanga. He was quoted as saying, “Why fix something that ain’t broke. Why restructure a system that has been providing the government with a steady stream of predictable revenues.”

The question is: is the existing excise tax on cigarettes delivering the right amount of revenues to this cash-strap administration?

How much are cigarette makers paying?

During the hearings conducted by the Ways and Means committee, there is disagreement as to how much cigarette manufacturers were paying in taxes. Philippine Tobacco Institute (PTI) president Rudy Salanga told the congressmen that as of November 2010, the cigarette manufacturers paid more than P25.8 billion in taxes.

On the other hand, Dept. of Finance Undersecretary Gil Beltran reported that that the cigarette manufacturers would pay less than P25.8 billion in excise tax for 2010.

Data shows that tobacco tax revenue during the five year period 2004 up to 2009 was relatively flat with P23 billion registered in 2004 and P24.2 billion in 2009. Although total tobacco revenue has been relatively flat in absolute peso terms since 2004, it has been declining as a percentage of total government revenue, from 3.8 percent in 2004 to three percent in 2009.

It was also noted that the tobacco excise collection as a percentage of government revenue (three percent in 2009) is low compared with other Asian markets. Indonesia’s tobacco excise collection is seven percent of government revenues, while in Sri Lanka’s is seven percent and China’s is eight percent.

Legislators for increase in cigarette tax

The low tax take being realized by the existing excise tax system for cigarettes prompted a number of legislators to initiate moves to restructure the system and increase tax rates.

Iloilo Rep. Niel Tupas Jr. is pushing for an increased and unitary tax rate for tobacco products to generate more revenues for the government. Rep. Tupas also believes that restructuring the excise tax on tobacco products is necessary to promote health, citing that the economic cost of tobacco-related diseases are estimated to be between P100 billion and P300 billion.

Tupas, who is chairman of the House Committee on Justice, noted that amendments to the excise tax on cigarettes made in the past failed to discourage people from smoking, particularly the youth and the low-income groups. Studies also show that prices of cigarettes in the Philippines are the lowest in Asia.

Rep. Pryde Henry Teves of the 3rd District of Negros Oriental is one of the authors of HB2687 which proposes to restructure the cigarette excise tax system by increasing tax and removing the distinction of old and new brands. The old brands are given protection through an artificially low tax rates that deprived the government of much needed revenues.

Against increase in cigarette taxes

The National Tobacco Administration (NTA), under the Dept. of Agriculture, submitted a position paper opposing any increase in cigarette taxes. The paper cited the mandate and role of NTA “of improving the economic and living conditions of the farmers and those who depend upon the industry (tobacco) for their livelihood.”

NTA said that the increase in taxation will increase the prices of cigarettes and will result in the loss of livelihood of the tobacco farmers and their families together with the extension worker/technicians, the trading center re-drying plant and cigarette factory workers.

Another opponent to the proposed restructuring and increase in cigarette tax is Philip Morris, the multinational company that bought into the local company Fortune Tobacco. The merged company now controls 90 to 93 percent of the local cigarette market. 

In a press release, Philip Morris Fortune Tobacco Corp. Inc (PMFTC) president Chris Nelson appealed to the government to keep the present system for cigarettes. Echoing the statement of PTI president Salanga, Nelson said that the current system is working because BIR is regularly collecting over P25 billion each year. 

Weaknesses in present cigarette excise tax system

In a paper submitted to the Ways and Means Committee, Finance Undersecretary Beltran cited inherent weaknesses in the existing cigarette excise tax system that “put revenues at risk and undermine the role of the excise tax as a tool to curb the consumption of … tobacco.”

One of the weaknesses described by Beltran is that the current structure is complicated. There are various tax categories for classifying cigarettes and correspondingly with different applicable tax rates. This situation creates too much room for discretion on the part of the taxing authority.

The other more glaring weakness is the arbitrary protection being given to old brands (listed in annex D of RA8424 of 1996). According to the position paper submitted by Usec Beltran, the distinction between old and new brands under the current law defies logic and leads to unhealthy competition in the market. “The distinction has also deprived government of revenues since the tax on old brands is kept artificially low,” added Beltran.

The system needs fixing

Whilst the current excise system on cigarettes is not broken, as observed by Salanga and Philip Morris-Fortune Tobacco president Nelson, and generates over P25 billion in revenues, it is obvious that the current law has several weaknesses that makes it vulnerable to corrupt practices, and worse, is one of the best example of where significant “tax leakage” is occurring. Latest estimate shows that if the system is corrected, an additional P50 to P60 billion in taxes can be generated.

But it would take a large dose of political will to overcome the strong opposition particularly from a large multinational company with lots of resources that controls 90 percent to 93 percent of the billion-peso local cigarette market.

Will the P-Noy administration have the guts?

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.