Sin

If new revenue measures are to be introduced, they will likely be in the form of additional “sin taxes.” These are taxes imposed on alcohol and tobacco products, commodities that cannot be described as essential and whose use entail social costs.

There are two good reasons why “sin taxes” are the easiest means to boost government revenues. First, they could be raised without incurring much political costs as few would object to taxing them even more. Second, our present “sin taxes”, although they might seem stiff, are low in comparison to other countries.

For instance, although I am a smoker, I will never object to stiffer tax penalties on tobacco products. If the habit, because of taxation, becomes a real pain in the pocket, I might finally do the beneficial thing of quitting this evil item of consumption.

After all, the other function of tax policy, after ensuring government revenues, is to regulate social behavior. Taxes enable government to dissuade citizens from destructive or wasteful behavior and encourage people towards positive social behavior.

As a means for encouraging positive social behavior such as savings and investment, concern for the environment and sympathy for the health of others, taxation is a more effective instrument than preaching from the pulpit. Taxation effectively discourages wasteful use of energy, imprudent consumption and, yes, habitual use of unhealthy products.

The assumption, of course, is that taxes are wisely designed and objectively enforced.

That is not always the case. Anyone who has followed closely the erratic evolution of our tax policies know that the design of our revenue measures and their actual enforcement are vulnerable to political pressures exerted by powerful business lobbies and to the exercise of bureaucratic whim that is often financially enticed.

Take the case of one brand of cigarettes: Pall Mall.

At the Duty Free Shops, a pack of Pall Mall is priced at P85 inclusive of the P25 excise tax prescribed by law. At the local sari-sari store, the locally produced version of the same brand sells for P14 a pack, inclusive of the P6.35 excise tax determined by its own manufacturer.

La Suerte Cigar and Cigarette Company introduced the brand in 2004 under a trade mark licensing agreement with British American Tobacco. That agreement clearly provided there should be no distinction in quality between local and imported Pall Malls. Taking advantage of a weak provision in the tax law, the manufacturer was allowed to provisionally peg for two years the retail price of this particular product inclusive of the excise tax.

After that two-year period, however, the BIR has the right to determine the excise tax to be incorporated in the product’s selling price.

La Suerte initially priced Pall Mall cigarettes at P12 per pack, inclusive of P5.60 in excise tax. After RA 9334, which adjusted “sin taxes”, took effect in January 2005, the price of this product was raised to P14 per pack, inclusive of P6.35 in excise tax.

Last February, however, then BIR Commissioner Jose Mario Bunag exercised the mandate and authority of the revenue agency to determine the validity of La Suerte’s self-appraised excise tax on Pall Malls. The two-year “grace” period allowed by the law had lapsed.

Pursuant to Revenue Regulation No. 3-2006, Bunag ruled that an excise tax of P26.06 be levied on every pack of Pall Malls. The abovementioned regulation clearly stated that taxes charged on the importation or manufacture of a new brand of cigarettes should not be lower than the taxes collected from the same brand as sold in the Duty Free Shops.

The Bunag ruling was entirely consistent with the National Internal Revenue Code as implemented in the case of alcohol and tobacco products. But he probably paid a high price for consistency with the law.

Quite strangely, the Department of Finance reversed the Bunag ruling and allowed Pall Mall to continue its self-appraised excise tax level of P6.35 per pack.

There are many theories about why the DOF reversed the BIR ruling on the Pall Mall case, notwithstanding the clarity of the law as it applies here. Repeating in print any of those theories will probably land me a libel case.

At any rate, industry experts estimate that the DOF ruling results in a loss of P93 million in potential revenues each year. Considering that every effort is now being exercised to raise revenues and bring down the deficit level, the reversal of the BIR’s ruling on the Pall Mall case looks very strange indeed.

In the meantime, Pall Malls have become unavailable at the Duty Free Shops. Locally produced versions of the product, which by agreement with British American Tobacco, completely resembles to imported versions, are being sold at a ridiculously low price of P14 per pack — where it could be found.

Being a connoisseur of sorts of cigarette products, I have tried to buy Pall Malls but could not find them in any of my usual sources.

Industry experts say a game is being played here. The brand is currently being sold at a loss, which explains why the scarcity of the product. The objective is to make the lower tax bracket on the product permanent — which happens after 18 months. After that, the price per pack will be raised and production will carry on full scale.

That is a smart way to play around the “sin taxes” and force government to permanently under-collect excise taxes. The objectives of imposing the “sin taxes” will be nullified.

And the Bunag ruling will be quietly buried in the archives. Along with it, the intent of the law.