JTI warns: Further increase in cigarette taxes? Expect more smuggling

MANILA, Philippines — Amid the big push by the departments of Health (DOH) and of Finance (DOF) to further jack up the excise taxes slapped on “sin” products such as cigarettes and alcoholic drinks, the Philippine unit of global manufacturing giant Japan Tobacco International (JTI) has warned that higher levies would only exacerbate already worsening cigarette smuggling.

“When we talk about the tobacco industry we need to bring in mind: the thousands of farmers, millions of retailers, thousands of employees, thousands of those indirectly work for tobacco, many suppliers and their employees, and all those who benefit from the income generated by the tobacco consumption – all of them will be negatively affected by a tax hike,” JTI Philippines general manager Manos Koukourakis said in a text message to reporters on Monday.

On the other hand, Koukourakis said “smugglers will benefit because the higher the tax, the higher the benefit due to tax avoidance.”

Earlier, both DOF and the Bureau of Internal Revenue (BIR) admitted that alongside increased excise taxes under the Tax Reform for Acceleration and Inclusion (TRAIN) Act came a proliferation of illicit cigarette trade in the country.

Under the TRAIN Law, the unitary cigarette excise tax already rose to P35 per pack since July last year.

But DOF wanted to further increase cigarette excise taxes to at least P60 a pack starting this year, hence lobbying for the approval of Senate Bill (SB) No. 1599 sponsored by Sen. Manny Pacquiao before the 17th Congress comes to close in three weeks’ time.

However, Koukourakis noted that “countries which raised taxes steeply still suffer by the effects of smuggling, government coffers included.”

“Everything looks good short term, but mid to longer term the consequences are rather dire and we’ve seen it in Malaysia, Thailand, Singapore, Indonesia, and so many other places,” he added.

“Currently in the Philippines we have a quite balanced situation, such as: the smokers keep ditching the habit, from 26 million in 2013 down to 16 million in 2018; the young people turn their backs against smoking at the highest rates as never before, minus 48 percent; the tobacco smugglers are broadly kept at bay for two reasons – the coordinated efforts against them by the BIR and BOC [the Bureau of Customs] and the collaboration and investment put behind by the legitimate tobacco industry; and the government keeps collecting more from tobacco – P130 billion in 2018 [and] more in 2019,” Koukourakis said.

“When such a unique balance is stricken, why would anyone like to disrupt it? Not sure there is another country in the entire Asia-Pacific to be at this fortunate situation. No industry is immune to tax increases and the tobacco industry falls in this category too,” he added.

For Koukourakis, “the current House of Representatives passed a bill which increases tobacco taxes in a reasonable and predictable way.”

“This bill will not disrupt the balance – less smokers/less smugglers/more revenues, and ultimately everybody will benefit from it,” he said.

Last year, the Lower House approved on third and final reading higher excise taxes on tobacco products, but only to P37.50 per pack starting July this year, before further increasing to P40 in July 2020, P42.50 in July 2021, P45 in July 2022, and by 4 percent annually starting July 2023.

But Finance Secretary Carlos G. Dominguez III last week said the revenues to be generated by the House measure “will hardly make a dent on the funding gap” for the Universal Health Care Law recently signed by President Rodrigo Duterte.

In the Senate, there were three pending bills aimed at jacking up the excise tax on cigarettes to between P60 and P90 a pack this year.

The government needs P258 billion next year to implement the universal health care program, and higher sin taxes were going to be among its main source of funding, Health Secretary Francisco Duque III said last week.

However, the government could only raise P195 billion in 2020 without sin tax reform – a funding gap of P62 billion, Dominguez had said.

“From 2020 to 2024, all current sources of government funding can cover around P200 billion annually or a total of P1 trillion, while the cost of the universal healthcare program will continue to grow to as much as P1.44 trillion. Without sin tax reform, the cumulative funding gap by 2024 will stand at P426 billion or about one-third of the total cost,” according to Dominguez.

For Dominguez, funding for universal health care can only be sufficient if  Pacquiao’s SB 1599 was passed into law.

“If SB 1599 is not passed, then we cannot fully implement the universal health care program. There will be gaps – either not enough people will be served, or all people will be served but not all the requirements,” Dominguez had warned.