Sin retribution
The government’s goal in imposing taxes on so-called sin products, which are cigarettes and liquor, is two-fold: to raise revenues and protect the health of citizens, which should be gains that must be parallel to each other.
All factors being constant, increased revenues would mean money generated from well-off smokers and drinkers whose tax payments are used for health programs while the predominant poor are discouraged from the vices because of their high prices.
However, the sin tax program’s success has been derailed by weak regulatory enforcement primarily due to smuggling, resulting in substantial tax losses.
A study by the University of Asia and the Pacific said the increased market share of smuggled cigarettes hurts the economy to the tune of some P106 billion annually.
Moreover, there is a multiplier effect in terms of losses in economic output of P118.4 billion, value-added tax of P115.5 billion, and household income of P49.7 billion.
Policies that do not receive support erode the tool’s effectiveness in achieving the government’s objectives and, worse, pose unfair competition to compliant companies.
The report cited the Tax Reform Act of 1997 (RA 8424) and its subsequent amendments — the Sin Tax Reform Act of 2012 (RA 10351), the Tax Reform for Acceleration and Inclusion or TRAIN Law of 2017 (RA 10963), and the Tobacco Tax Law of 2019 (RA 11346).
The Global Adult Tobacco Survey or GATS and Euromonitor data have shown a decrease in cigarette consumption due to the tax schemes. Still, the report said the laws were directly correlated to the increase in the illicit cigarette trade.
Over the past 10 years, double-digit shares of unregistered brands and counterfeits in the market followed the implementation of the TRAIN Law and Tobacco Tax
Law.
“Cigarette taxation deters smoking but should also ensure a level playing field. High smoking prevalence in the Philippines has been a major concern due to historically low tobacco product prices, especially among the youth and the poor,” according to the report.
Tax reforms were generally successful in curbing smoking and increasing tax collections.
Based on government figures, smoking prevalence decreased from 22.7 percent of the population in 2015 to 18.5 percent in 2021.
“This, however, does not discount the presence of illicit cigarettes that still undermines the efforts to reduce tobacco consumption and protect public health,” it added.
The passage of new tax laws saw a considerable contribution to cigarette excise taxes. The most significant increase in excise tax revenue occurred in 2013 when RA 10351 was implemented, which led to a 64.29-percent increase in excise tax revenues and a 117-percent increase in tobacco tax revenues.
The tax revenues collected in 2015 were approximately P97 billion, which increased to about P128 billion by 2022.
The increase in 2018 due to RA 10963 was not as high but could still be considered significant. The percentage contributed by excise taxes also decreased from 37.64 percent in 2019 to 31.23 percent in 2020, which could be attributed to the adverse effects of the Covid-19 pandemic on the economy.
However, UA&P’s report said this increased in 2021 to 54.24 percent. This was primarily to allot more funds for the UHC program.
Notwithstanding the decrease in cigarette consumption and the additional revenues going to the government coffers, the volume and, thus, the proportion of illicit cigarette consumption has increased.
In both cases of collecting sin taxes and halting the prevalence of smuggling, government policies are indispensable.
“Policies that do not receive support erode the tool’s effectiveness in achieving the objectives of the government and, worse, pose unfair competition to compliant companies.
“The success of the sin tax program, however, has been derailed by weak regulatory enforcement primarily due to smuggling, resulting in huge tax losses.