Sin tax revenues down sharply in 2011

Excise tax collection on so-called “sin products” fell by a fifth in 2011 to an estimated P25.4 billion from P31.5 billion the previous year, according to the Department of Finance (DoF).

Finance Undersecretary Jeremias N. Paul said in a statement the decrease “proves that our current excise tax scheme for tobacco is structurally flawed and is in need of immediate changes.”

“Although PMFTC has claimed that nothing is wrong with our sin tax system, the figures show how vulnerable this system is to being abused,” Paul said.

He was referring to the merger of Philip Morris and Fortune Tobacco, which caters to about 90 percent of the domestic market and which opposes proposed changes in the excise tax system.

PMFTC president Chris Nelson has argued that amending tax regime would slash revenues of legitimate companies and encourage illicit trade of tobacco products which, in turn, would translate to a fall in tax collection.

But Paul said collection data since this law, Republic Act No. 9334, took effect in 2005 challenges PMFTC’s claims.

“Actually, our collections since 2004 have been badly see-sawing because of the practice of tobacco companies called ‘front-loading,’” Paul said. “Before revenues rose in 2010 and 2008, they fell by 13 percent in 2009, and 12 percent in 2007—the years when taxes were raised.”

RA 9334 classified tobacco products into different price and tax categories that should and—did—increase in 2005, 2007, 2009 and 2011.

Frontloading means that tobacco firms advanced shipments near the end of the year before the tax hikes to avoid higher liabilities.

Paul said that frontloading, combined with other flaws of the present sin tax law such as a multi-tiered system that protects old brands at 1996 tax rates and non-indexation to inflation, the current tax structure has failed to foster a fiscal environment of fair competition and buoyant tax revenues.

“That’s why we need the Abaya reform bill to fix this,” he said, referring to Cavite Representative Joseph Abaya’s proposal for a single-tier system on tobacco taxes.

The DoF has estimated that at least P19.5 billion has been lost in revenues from 2006 to 2010 due to cigarette consumption that has merely downshifted from higher to lower-priced brands—a trend which the critics of the current multi-tiered system say has encouraged.