Here we go again

Without any warning, the House of "our" Representatives passed House Bill (HB) 4144 which retains a two-tiered tax system for cigarettes. The reason behind the move is anybody's guess. To make the measure appear as a pro-farmer initiative, a group of tobacco farmers had a manifesto published in daily broadsheets. It was crafted in perfect English. The leaders of the farmers' group lauded the measure by saying that it will protect local cigarette producers who use low-grade tobacco leaves. I could not help but feel nostalgic upon reading the manifesto. It felt like reading a similar manifesto that was published in 1991. Proponents of the then ad valorem system strongly argued that cheaper cigarettes deserve a lower tax burden because they are locally produced and that their manufacturers patronize locally grown tobaccos. A case of Deja vu?

The imposition of a single tax rate of R30.00 per pack on all types of cigarettes was the culmination of a long struggle to tax cigarettes efficiently. It started in 1991 with the shift from ad valorem to specific tax system. It was painfully fought with a fiscal stance because the system became a convenient avenue for tax avoidance (aka tax evasion). Manufacturers created marketing arms that bought cigarettes from manufacturers at outrageously low prices to enjoy a lower tax liability. The cigarettes were then sold to retail outlets at their true prices. The government and the public it serves ended up as losers in terms of lost revenues to the tune of R25.0 billion.

The DOF (Department of Finance) then shuddered at the public services that could have been provided if the tax were collected well. It became a personal crusade with the sight of the homeless poor sleeping on streets and the crowded hospital wards. Despite what were the clear objectives of the tax measure, its legislation took almost six years. Congress also made sure that it was watered down by imposing several tiers of tax rates and by dropping the indexation clause.

By some miracle, the use of a single tax rate was adopted, albeit phased. Congress also adopted an adjustment of the tax rate by 4% every year starting 2018. It helped greatly that the taxation of cigarettes became a health issue. Effective excise taxation was needed to discourage consumption of a very harmful commodity.

So why are the hands of time being turned? Why should we be losing a victory that was gained? If government is serious in pursuing a comprehensive tax reform, why is it creating serious loopholes in the taxation of cigarettes once more?

The use of two tiers, R32.00 for lower priced-cigarettes (R11.50 and below per pack) and R36.00 for higherpriced cigarettes (more than R11.50) is a perfect incentive for manufacturers to under-value their products. We will have cigarettes "masquerading" as lowpriced. The loser will be government and the public it serves.

The figures do not support the “farmers” claims. Almost 86% of tobacco production is of the Virginia and Burley type that are used by high-priced cigarettes. Seventy-percent (70%) of native tobacco is exported and only 30% is consumed locally. The facts do not lead credence to the claim that tobacco farmers who produce low-grade tobacco will suffer the most. Consider the fact too that 15% of the incremental revenues from the excise tax on cigarettes are earmarked to promote the welfare of tobacco farmers by improving their productivity and helping them to shift production to other agricultural products.

During the deliberations, the sponsor of the bill admitted that the DOF, DOH, BIR, and NTRC were against the measure. Civil society and tobacco producers were against it as well. Only two firms, Mighty Corporation and British-American Tobacco were rooting for it. And yet, the Lower House passed the measure. Why? mguevara@synergeia.org.ph