Revenue losses from illicit cigarettes to rise to P43 billion

MANILA, Philippines — Government losses from the illicit cigarette trade will likely jump to P43 billion over the next four years if enforcement will remain weak, with the entry of the contraband commodity worsening.

The latest study done by the University of Asia and the Pacific (UA&P) and the Federation of Philippine Industries Inc. showed that high smoking prevalence in the Philippines is still a major concern, especially for the youth and those in the lower socioeconomic class.

Despite the government imposing higher taxes on cigarettes, UA&P economist Alyssamae Nuñez said the illicit trade of cigarettes has shown an increasing trend while that of the formal retail trade exhibited a decline over the years.

Data showed that for this year, the government stands to lose some P30.57 billion in revenues, almost 20 percent higher than the 2022 foregone taxes of P26.19 billion.

This will also be the fourth straight year of increase in the value of foregone revenues.

Lost taxes will further increase to P33.7 billion next year and jump to P36.8 billion by 2025. The value is seen rising to P39.8 billion by 2026 and ballooning to P42.54 billion a year later.

For comparison, last year’s foregone taxes alone could have financed 57,000 socialized housing units, 8,642 classrooms and 75 hospitals.

Nuñez emphasized that high taxation, which leads to high-priced cigarettes, has an unintended consequence as it encourages the rise of illicit cigarette trade.

“Without effective regulatory enforcement in reducing or completely eliminating illicit cigarette trade, all efforts in ensuring a level playing field, lowering smoking prevalence and raising tax revenues will all go down the drain,” Nuñez said.

“If we have the same level of enforcement, the trend and value will continue to increase. The administration should enforce stricter and stiffer regulations on cigarette smugglers,” she said.

Further, the study revealed a decrease in the cigarette sales in the formal market, but illicit trade volume has been on an uptrend.

This was specifically noted upon the enactment of the Sin Tax Law in 2012 and the Tax Reform for Acceleration and Inclusion Law in 2018, after which the illicit cigarette trade grew by 83 and 21 percent, respectively.

The share of legal cigarette sales declined to 83.5 percent last year from 88 percent in 2013 while illicit cigarette sales increased to 16.5 percent from just 12 percent 10 years ago.

Over the past five years, the illicit cigarette trade also contributed an average of 0.39 percent decline in gross domestic product and household income at 0.63 percent.

A much larger decline was noted in employment at 4.9 percent.

“Illicit trade most severely affects the ability of the cigarette industry and all other interrelated industries to create more productive jobs,” Nuñez said.

Amid the current situation, Nuñez argued that the government cannot afford to impose new taxes on an industry facing illicit trade.

Instead, she called on the administration to complement its efforts by collaborating with other institutions, engaging with international bodies and conventions, and promoting awareness of the adverse impact of illicit cigarette trade on nations and their economies.

It should be noted that proceeds from cigarette taxes support tobacco-related livelihoods and fund the Universal Health Care program.