THE Philippines should take a reasonable and gradual approach in raising excise tax on products such as cigarettes to counter the growing illicit trade of cigarettes in the country, the head of a US-based think tank said.
Daniel Witt, president of the International Tax and Investment Center (ITIC), said in a study that the Philippines lost a total of P16.2 billion in tax revenues last year from the illegal trade of cigarettes. The amount represents 15.3 percent of the country’s potential total excise tax revenue.
Citing the “Asia-14 Illicit Tobacco Indicator 2013” study, Witt said the Philippines now accounts for 34 percent of all illicit cigarette consumption in the Association of Southeast Asian Nations (Asean) region, second only to Vietnam which accounts for 39 percent.
“Since our 2012 study, the Philippines has seen the fastest growth year-on-year in illicit cigarette consumption and now accounts for 97 percent of the entire domestic cigarette consumption in Asean,” he said.
He added that the recent findings reflect the huge problem of locally manufactured cigarettes being released into the market without the appropriate taxes being paid.
Witt traces this problem to the government’s implementation of higher sin tax rates in the country last year.
According to the study, excise tax rates on the majority of cigarettes in the Philippines rose by 341 percent in January 2013.
He said that if you try to raise taxes too high and too fast, you create a demand for black market goods. “When you raise the tax by over 300 percent, that’s what we call a tax shock,” he said.
Witt explained that a sudden and sharp increase in excise tax ignores affordability, which can result in unaffordable products that would then fuel demand for cheaper products and create the opportunity for illegal traders to widen the black market.
He pointed out that while the government needs to generate revenue through taxes, it should do so in a way that does not encourage the black market.
Government must impose tax rates using a reasonable and gradual approach. By doing so, it balances three objectives: the revenue objectives, the health objective and the legal objectives, he said.
On a positive note, Witt lauded the government, particularly the Bureau of Internal Revenue, on its newly implemented stamp tax system.
“I think the tax stamp system by the BIR could be a helpful tool to close the excise tax gap, but it must be coupled with vigilant and sustained enforcement,” he said.
The Internal Revenue Stamps Integrated System or IRSIS refers to the issuance of tax stamps on cigarette packs. The permanent stamps would replace the easily detachable stickers currently placed on cigarette packs sold in the country.
IRSIS will be implemented through a web-based system that involves distribution and monitoring capabilities, which will ensure the collection of correct excise taxes on tobacco products.