The International Monetary Fund is proposing that the government adopt a single rate of cigarette tax, saying such a move would yield anywhere between P31.8 billion and P33.8 billion in additional revenues in the first year of implementation.
The IMF presented its calculations in a study requested by the Department of Finance, which is seeking an amendment to a so-called Sin Tax Law of 2005, which has a four-tier tax system with rates ranging from P2.23 to P26.06 a pack.
The revenue gain estimated by the IMF is based on the assumption that a uniform rate of excise tax will be set at P14 a pack, as proposed in House Bill 3759, authored by Representative Danilo Suarez.
The IMF’s estimate of revenue gain is a little less than Suarez’s forecast of P34.2 billion. The IMF said it took into account price elasticity of demand—the change in volume of consumption of a good when its price increases or decreases—in making its estimate.
The IMF study shows that the price elasticity of demand for cigarettes is relatively low: For every 100-percent increase in cigarette price, volume of demand goes down by 0.6-1.1 percent.
Since demand for cigarettes is nearly price inelastic, an increase in the average excise tax rate, which will push prices up, is not expected to substantially reduce consumption. Increasing the tax would therefore lead to higher revenue for the government, the IMF said.
Suarez’s proposal says P5.64 a pack should be the uniform rate of excise tax on cigarettes if the government simply wants to keep the same amount of tax collection, with four tax rates. A uniform rate of P14 would therefore earn incremental revenue.
The IMF also took into account the ill-effects of the front-loading of cigarette production in computing the estimated revenue gain with a uniform rate of P14 a pack.
Front-loading happens when a cigarette manufacturer produces more than the usual volume of cigarettes during the months prior to the implementation of a higher excise tax rate to initially escape payment of higher taxes. Edited by INQUIRER.net
