Tobacco lobby continues to PHL cigarettes among the cheapest in Asia

The global movement to regulate and heavily tax the tobacco industry has made progress in many countries. But in the Philippines, cigarettes remained relatively cheap and easy to tax, largely due to the powerful lobby of tobacco, which are still blocked efforts to expand the so-called “tax sin.”

The World Health Organization recently said that an average of only $ 0.50 per pack of the most popular brands, Filipino cigarettes are among the cheapest in Asia. WHO recommends at least 70 percent excise tax on the retail price of cigarettes, which are currently only 22 per cent in the Philippines.
This objective should not be too difficult to maintain. However, due to a sharp division of opinion on its potential impact on the local tobacco agriculture and competition in the market of cigarettes, the proposed policy measures sparked noisy debate and disagreement.

Already embroiled in a fight is a range of politicians, business leaders, both local and foreign, public officials and current and retired, economists, academics and NGOs. Several issues, such as sin taxes, so called because they are imposed on tobacco and alcohol, highly profitable products that feed the vices and accused of various diseases in their consumers, can inspire such a passionate encounter.

In the center of this clash is a huge market for cigarettes, which is now dominated by one manufacturer, Philip Morris Fortune Tobacco Inc (PMFT), as well as the local tobacco industry, which is less than 150 000 people, mostly in the northern part of Luzon, independent life.
Improving the tax system, covering the industry will lead to an increase in the collection, thereby increasing the tax effort of the country, which for decades remained below Asian standards, and reform advocates say the measure.

They also say that this scheme will not only economic growth, it will also support government programs to care for the health and livelihood of tobacco farmers. Critics argue, on the other hand, while the reform may indeed be able to level playing field for cigarette manufacturers, this step can damage some industry players more than others, and feared, easing consumption can dislocate the cultivation of tobacco.

While President Benigno Aquino threw his support behind the bill, the political opposition is desperately trying to either block or weaken the measure, which was presented to the House of Representatives in early August of last year. Groups opposed the bill, as they say, there is also support from the dominant company of cigarettes.

Single tax

The government continues to insist on the adoption of House Bill 5727, also called a “Sin Tax Reform Initiative,” which provides a new, unitary system of excise tax on all tobacco products, replacing the current four-level structure of the excise tax.

This single tax rate should be adjusted in the future to keep pace with inflation to maintain its share of overall economic growth in the country. Various studies show that the Philippine tax rates on cigarettes are the lowest in Southeast Asia, the dismal state revenue from this source.
Because tax rates are low, producers may also be made available cigarettes, effectively encouraging smoking, which is now known that a common cause of death and disease.

Economists say that cigarette prices are “inelastic”, meaning that consumption tends to remain stable even with a sharp rise in prices. As a rule, higher prices will soften the demand for most consumer goods. Under the current system, the brand of cigarettes, which were introduced in 1996 and previously subdivided into specific tax level, regardless of changes in their prices. On the other hand, brands that have entered the market after 1996, subject to the individual tax rate based on their prevailing retail prices. According to analysts, this tax structure promotes PMFT industry leader, which was established in 2010, after Philip Morris acquired a fortune tobacco. PMFT still the market share of say about 97 percent.

The bill provides for a single tax on the P30 in the 20-stick pack that is sold for P10 and more, with brands at a price lower than the P10 per pack should hit the initial tax rate for P14 per pack during the first year of reform measures, rising to P22 in the packing in the second year, and P30 in the third year.

On the other hand, the reform measures intended to shift the taxation of alcoholic beverages with the existing system, which is based on the same kinds of resources that takes into account the levels of alcohol content, with different tax rates will be combined into a single rate for all products within three years.
If the proposed system is adopted, the specific tax on alcoholic beverages will continue to grow, in the case of products with less than 45 percent alcohol, with P42.00 per liter in the proof of the first year of P159.14 in proof liters for the fifth year, according to calculations made by political reform advocacy group Action for Economic Reforms (AER). For a fermented beverage, AER calculations also show the tax rate for all grades, regardless of price, will unite in the P25.00 per liter during the first year that increases each year to reach P28.14 per liter for the fifth year.

“All told, the total gross income to be generated from a sin tax reform will be more than P530 billion pesos for six years,” AER stated in the position paper in support of the bill.

The target beneficiaries

Congressman Joseph Emilio A. Abaya (Cavite, first district), principal author of House of Representatives version of the bill, said the measure is expected to generate in the first year of P60 billion in tax revenue.
Much of that projected revenue will be spent on health care, especially the poor, said Abaya.

In addition, during the first five years of implementation of this measure is projected to the Ministry of Finance, “around P225 billion additional revenues from the tax reform, the sin will be devoted to furniture alternative livelihoods for all affected farmers.”
Expressing support for the bill, Speaker Feliciano Belmonte Jr. spoke of the sin tax, which is simple, and not a true multi-level rate and the inflation-adjusted. “The time has come when we have restructured our tobacco and alcohol excise taxes,” he said in a recent statement.

“The predominant number of tax classification of cigarettes and alcohol products and binding of sin taxes in 1996 price levels were confusing tax system and reduced the tax base, dampening efforts of the government revenue and, in fact depriving the public resources that could have been used to finance basic services” , Belmont said. Last week, a group headed by former top finance and health officials agreed with the measure, noting that the bill but seeks to “fix” the current excise tax structure, would be “to protect health, save lives and raise much-needed incomes for producers of tobacco and health care for all.”

The group, which released “The Manifesto of support for the” measure of tax reform, including the former Minister of Finance Margarito Teves, Ramon del Rosario, Jesus Estanislao, Ernest Leung, former health secretary Alberto Romualdez, Juan Flavier Jaime Galvez Tan, Esperanza Cabral, Juan Flavier and Alfredo Bengzon, a former Deputy Finance and Bernardo Romeo Milwida Guevara, and former National Treasurer Leonor Briones.

Manifesto coincided with the release of the international exhibition of tobacco in Manila, which was limited in the industry only private meetings and closed to the media and the public. The exhibition, according to its organizers, was aimed at providing “opportunities for the tobacco and cigarette manufacturers meet the suppliers of raw materials such as paper, filters, and process equipment.”

Reduced revenue yield

In a recent study, economists in the Manila office of the World Bank noted that the real return on revenue from excise taxes on tobacco and alcohol in the Philippines has fallen significantly in the 12 years prior to 2009. On the level of 1.2 percent in the Philippines, the total gross domestic product (GDP or value of all goods and services produced in the country) in 1997, the excise duty has been steadily declining by only 0.6 percent in 2009.

This decline, said the World Bank, “The Philippines Quarterly Update” in December 2011, was mainly due to lower tax rates, factors that were not updated regularly, as well as the use of 1996 prices to determine the tax rate for older products.
The report noted the “very disturbing” that a tax on tobacco excise tax rates, the lowest in Southeast Asia led to a consumer base for cigarettes in the Philippines, which is the largest among the countries of Southeast Asia and 15 in the world.

Low tax on tobacco is one of the reasons why the price of cigarettes in the Philippines, “among the cheapest among the low and middle income countries”, which led to the current situation where almost one-fifth of the Filipinos begin smoking before the age of 10, and the prevalence is increasing, according to in the report. The increase in excise taxes on cigarettes, the report says, is “to encourage poorer consumers in proportion to quit smoking than the rich.”

Opposition to Reform

Former finance and health officials, who last week publicly expressed support for the sin tax reforms also noted that the lobbying groups against the initiative received the support of the Lucio Tan Group, which controls the dominant PMFT cigarette manufacturer. They said that this same lobby group has been effectively served as “chief obstacle” for the tough reforms during the reign of former President Fidel Ramos and Gloria Macapagal-Arroyo.

In the house, “dogfight” is considered the bill between the advocates and the tobacco provinces in northern Luzon. The bill is still indented in the House Ways and Means Committee, of which 96 are critics of the bill.
One of the oft-repeated warnings of resistance groups through tax reform is that a significant increase in cigarette prices, which should flow from the high tax rates will encourage smuggling, which they say could undermine tax revenue.

As the government proposes to mitigate smuggling remains to be seen. So far the response from supporters of the bill was in the form of a statement, pointing to recent moves to strengthen the capacity of the Bureau of Customs. Nevertheless, proponents of the bill led the experiences of other countries to increase total tax revenues, even with leakage through corruption and smuggling. Closer to home, smuggling remains a serious problem during the last administration, even after a large number of tariff reductions on imported goods, proponents say.

Tax reform advocates in Congress are now in a race against time. Legislature in connection with the rest starting next week, returning in May, and adjourn the session early next month.
Even if the house wills the bill in the coming weeks, it still needs to be discussed in the Senate. She bared plans to return to the Philippines, he took on the local market four years ago after a multi-level structure of the tax hit its sales of new investments worth 200 million dollars.

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