Jump in illicit cigarette trade seen

While the government braces for the possibility that smuggling and counterfeiting of cigarettes and tax stamps would worsen once higher excise taxes take effect, Sen. Sonny Angara said Tuesday that the legislative could still jack up levies on “sin” products before the 17th Congress ends.

“It’s still possible but somewhat difficult if we were to gauge our colleagues,” Angara told the Inquirer when asked if the proposal of the Departments of Health (DOH) and of Finance (DOF) to further increase “sin” taxes could still get Congress’ approval during the remaining three weeks of session.

Angara, who chairs the Senate ways and means committee, also said the committee report on the pending sin tax hikes was “being finalized and will be filed soon.”

For his part, Finance Secretary Carlos G. Dominguez III told reporters that the so-called “Strike Team” of the Bureaus of Customs  and of Internal Revenue (BIR) against illicit cigarette trade was expected to be “able to handle” any surge in illegal activities such as smuggling and manufacture of fake cigarettes as well as internal revenue stamps.

“We want to make the risk of failure higher” for unscrupulous traders taking advantage of higher cigarette prices as a result of excise tax increases, Dominguez said.

Asked if he expected a further rise in illicit cigarette trade once excise taxes were again raised, Dominguez replied: “Yes, I think so. I think where the profit is bigger, people will enter.”

On Monday, Japan Tobacco International’s Philippine unit warned the government that further raising excise taxes would exacerbate already worsening cigarette smuggling.

The DOF and the BIR last year both 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 a pack since July last year.

But the 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 came to a close in three weeks’ time.

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

However, Dominguez last week said that 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 Duterte.

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

Sin tax reform also included jacking up levies on alcoholic drinks, but the House-approved increases in alcohol tax rates were also below the DOF’s original proposal.

The government needs P258 billion next year to implement the universal health care program, and higher sin taxes were 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 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 health care 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 could be sufficient only if Pacquiao’s SB 1599 is passed into law.

Also, without sin tax reform, there will not only be a funding gap for universal health care but also a possibility of ballooning costs to be shouldered by the government for its citizens’ alcohol- and tobacco-related diseases, Dominguez added.

Dominguez noted that while smoking prevalence declined to 22.7 percent in 2015 from 29 percent in 2012 due mainly to higher excise taxes under the Sin Tax Reform Law of 2012, the rate inched up to 23 percent in 2018, “a warning sign,” according to the head of the Duterte administration’s economic team.

“With the rise in incomes and slower rise in tobacco taxes over the past few years, tobacco has again become affordable to the youth and the average Filipino. The deterrent effects of the original excise taxes have been eroded. If we do not regularly update the rates to address this reality, we run the risk of reversing previous gains,” Dominguez said.

As for alcohol, the 2012 sin tax law was a failure as Dominguez said it “did not raise excise taxes to the level that both fiscal and health authorities deemed ideal.”

“As a result, prevalence of binge drinking among regular consumers continues to rise. The deterrent effect of sin tax on alcohol products has not been achieved,” the DOF chief said.

Dominguez disclosed that after a recent Cabinet meeting, the DOH and the DOF were “given clear and urgent instructions—tax alcohol and tobacco at higher rates than current levels and fund universal health care beginning this year.”