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The House ways and means committee on Monday swiftly moved to pass a bill backed by homegrown tobacco firm Mighty Corp. aimed at retaining the two-tiered excise tax system on cigarettes even as the Sin Tax Reform Law mandated a shift to a unitary rate next year.
The Department of Finance, multinational cigarette companies as well as health groups were opposing House Bill No. 4144, which 26 committee members voted to be passed. Surprisingly, not one congressman in the committee opposed the passage of HB 4144, although Albay Rep. Joey Salceda said he had reservations despite agreeing that the excise rate should be higher next year.
Under the Sin Tax Reform Law or RA 10351, tobacco products will be slapped a unitary rate of P30 per pack starting Jan. 1, 2017, following a two-tiered system this year wherein cigarettes priced P11.50 per pack were taxed P25 while those priced higher were slapped P29 per pack.
But HB 4144 was proposing that the two-tiered system be maintained by slapping an excise tax rate of P32 per pack on cigarette packs priced P11.50 and below and P36 for those priced higher. It also proposed an annual 5-percent increase in the excise tax beginning 2018.
Committee chair and Quirino Rep. Dakila Cua said the bill was also being adopted as the committee report such that it would soon be tackled in the plenary, likely before congressional sessions end this year.
Industry sources claimed the bill was railroaded—it was filed only in October and had undergone only two hearings, the first one last Nov. 28.
Former economic planning chief Romulo Neri, who said he was a consultant at Bulacan-based Mighty, argued that a unitary tax system was regressive and anti-poor. Mighty caters to the lower-end market.
HB 4144 claimed that “when the unitary excise tax is imposed next year, this would displace more local tobacco farmers especially those situated in Northern Luzon.”
But in a position paper, the Department of Finance said a two-tiered structure only promotes downshifting and therefore does not fully discourage tobacco consumption. “Differences in price as a result of different tax rates change the behavior of consumer by ‘downshifting’ to the low-taxed, low-priced brands from high-taxed, high-priced brands. Downshifting was evident after RA 10351 was implemented in 2013. This reduces the expected decline in consumption, in particular, if the price or tax gap between the tiers is significant.”
Also, the DOF said a tiered structure “incentivizes tobacco companies to employ pricing strategies in order to start within the lower band resulting in the continued access to low-priced cigarettes.”
“Tiered structure effectively negates the objective of discouraging tobacco consumption. Based on the industry’s pricing strategy, in particular, during the first year of reform implementation, the two-tiered structure even allowed some tobacco manufacturers to sell at a loss just to maintain or increase its market share. Further, our data likewise shows that they imposed higher price increases in premium brands to subsidize its low-priced brands,” the DOF noted.
The DOF added that in contrast to a tiered system, “a unitary structure is simpler and easier to administer.”
Sticking to a two-tiered structure “is prone to misreporting and misclassification of volume of removals from high-taxed to low-taxed brands resulting to lower revenues for the government,” the DOF said.
For the part of PMFTC Inc., it said in a Dec. 5 position paper addressed to Cua that it “supports the current tobacco excise tax structure under RA 10351.”
PMFTC corporate affairs director Richard James said pursuing two new tax tiers in 2017 under HB 4144 instead of the unitary rate under RA 10351 “will drive legal cigarette industry volumes lower, thereby impacting tobacco leaf demand, negatively impacting farmers.”
“The provisions of [HB 4144] therefore go against the stated objectives, that being to protect the livelihood of tobacco farming families and communities,” James said.
Citing reports of still rampant illicit cigarette trade, James said PMFTC does not support any tweak to the Sin Tax Reform Law at this point as well as reverting to a two-tiered tax system.