‘Sin’ taxes blow out smoking in PH, but gives life to illicit cigarette trade

HONG KONG—The higher “sin” taxes on cigarettes have steadily cut smoking in the Philippines, but it has also buttressed the sales of cheaper products that allegedly evade tax payments.

A preliminary report of UK-based Oxford Economics on the Philippines’ illicit tobacco trade showed that total cigarette consumption in the country dropped to 102.3 billion sticks in 2014 from 105.5 billion in 2013 and 108.7 billion in 2012.

Oliver Salmon, Oxford Economics senior Asian economist, told a press briefing the “tax shock” due to the implementation of the Sin Tax Reform Law or Republic Act (RA) No. 10351 since 2013 caused the “gentle decline” in cigarette sales.

Under RA 10351, cigarette packs below P11.50 were slapped P17 in additional excise tax last year from P12 per pack in 2013. As for packs that were priced P11.50 and above, they were levied P27 in sin tax in 2014, up from P25 in the previous year.

However, the volume of so-called illicit cigarettes—those that are sold and consumed without the payment of excise and value-added taxes or VAT—saw a “sharp rise,” Salmon noted.

In 2014, illicit cigarette use in the country increased to 19.9 billion sticks or 19.4 percent of the total sales, the Oxford Economics’ Asia-16 Illicit Tobacco Indicator 2014 report showed. This was up from 19.1 billion sticks or 18.1 percent of the total sales in 2013.

The use of locally manufactured cigarettes that were illegally sold also rose to 19 billion sticks or 95 percent of all illicit cigarette products in the domestic market, from 2013’s 17.1 billion sticks.

“Significant price increases over the last few years have led to the erosion of the legal market for cigarettes, with the illicit trade filling the gap,” Salmon said.

“Significant tax-led price increases have left the market exposed to the threat of cheap illicit cigarettes coming from other countries, as well as counterfeits of well-known brands,” he added.

In all, illicit consumption of cigarettes in the Philippines last year resulted into P22.5 billion in foregone revenues, up 44.1 percent from P15.6 billion in 2013, the Oxford Economics report showed.

“Combating illicit trade has no quick fix,” Salmon pointed out, although he said the Bureau of Internal Revenue’s (BIR) implementation of the Internal Revenue Stamps Integrated System (Irsis) starting this year was “a positive step in the right direction.”

The BIR had ordered that all packs of cigarettes produced in the country beginning Dec. 1, 2014, must be affixed with tax stamps, so that only stamped locally made cigarettes will be sold in the market beginning March 1 this year. As for imported cigarettes, all packs must bear tax stamps starting April 1.

“Legal domestic sales (or tax paid volumes) declined again last year, to only 82.3 billion cigarettes. Overall, following the implementation of the new sin tax law in 2013, legal domestic sales have fallen by nearly 20 billion cigarettes,” he noted.