Restructuring the 'sin' tax system

We all know how badly written our general tax structure is. For decades, the regular pay checks of salaried office workers had been automatically taxed so much so that this setup had become one of the most efficient tax revenue channels for government.

On the other hand, all others – small businesses, professionals, even big companies – are allowed to declare in their statement of accounts what they deem to be their income and expense levels, and consequently how much taxes they have to pay to government.

Even tax assessments on imports are subject to varied interpretations, thus opening the door to “negotiations” on how much the imports should be levied. This form of technical smuggling has not only resulted in a lower income for government, but has also affected the competitive playing field of certain industries.

Clearly, the government’s tax system has its “wang-wang” users, those influential and powerful who enjoy the “benefits” that accrue with knowing how to navigate and manipulate overly technical and complicated tax laws and rulings.

‘Sin’ taxes

One such example is the current excise tax system on “sin” taxes. A revamp of its existing ruling is long overdue by government and would result to substantially raising revenues while sparing the broad taxpaying base. “Sin” products refer to alcoholic beverages and cigarettes and tobacco.

A number of bills have already been filed to reform the existing excise tax structure on “sin” products. There are also several groups that are supporting these bills not only to generate more revenues for the government but likewise to discourage the consumption of alcohol and tobacco.

Currently, there are four levels making up the cigarette excise tax structure based on the net retail selling price per pack. These are low-priced, medium-priced, high-priced and very high-priced.

However, many cigarette brands categorized by Appendix D of RA 8424 receive protection, thereby allowing these to be levied low excises taxes that have been pegged over the last 14 years to their 1996 retail prices.

As a result, the government take on the cigarette industry has been declining as a percentage of sales, largely because these “protected” brands have been raising their selling prices. From 2000 to 2006 alone, lost revenues because of this arbitrary protection extended by the current excise tax system was estimated at P144 billion.

Unfreeze arbitrary price classification

A key initiative to reform the existing excise tax structure on cigarettes would be to remove the price classification freeze. This arbitrary taxation scheme has provided one of the best tax shields for those who dominate the industry, allowing the companies to strengthen their hold on the market. Presently, the merged Philip Morris and Fortune Tobacco (of Lucio Tan) companies control over 90 percent of the cigarette market.

The price classification system has also prevented other tobacco firms from entering the market. This likewise has given the country an image of favoring unfair trade practices and promoting an uneven playing field for the industry.

Simplify multi-level structure

Aside from removing the price classification freeze, reforming the excise tax structure should also entail a shift from a multi-level to a single tax structure. This could be done in transition stages, as was suggested by some economists, to make the change as painless as possible.

For example, the first stage, after removing the “14-year old” arbitrary price classification freeze, would be to reduce the four tiers to three. This could be done on the first year of the implementation of a revised law.

On the following year, or one year after the price classification freeze is lifted, the number of tax tiers could further be reduced to two; and after another year, the change to a single level tax structure could be implemented.

The other aspect of the excise tax reform would be increasing the uniform specific rate by at least 10 percent every year to compensate for inflation, thereby also reducing consumption of cigarettes.

Liquor taxes

The government should also take a better look at its taxes on liquor, especially after the World Trade Organization was reported to have recently ruled that the Philippine customs levies on some imported brands only favored local producers.

American producers of Jack Daniel and Jim Beam, as well as Spain’s Brandy de Jerez had questioned what it referred to as the Philippines’ discriminatory tax approach to taxing imported liquor with the imposition of duties that are 10 to 40 times higher than that imposed on local distilled brands.

This is a development that has parallel implications to the cigarette tax system, and is now reportedly being monitored closely by the government. It wouldn’t look good on the country if there were another similar case filed with the WTO.

Wider tax base

On its second year, the current administration will need to look at improving its tax collection not just to cover for the growing cost of running a bureaucracy but also to reduce its debt levels. This will ultimately have a better effect towards bringing the country’s sovereign rating to investment grade.

Any new money collected from restructuring “sin” taxes could also be allocated to augment the cost of supporting the government’s health care system, especially now that P-Noy has promised a more extravagant package to the poorest of the poor.

Should P-Noy care?

Our President, who is a self-confessed cigarette smoker, may not be too concerned about the cost of tobacco-related illnesses. He is after all with enough means to pay for these.

But what about those belonging to the lower segments of society, especially the youth? They are very vulnerable to being hooked on the health-hazardous habit of smoking because cigarettes are easily accessible and relatively cheap in our country. They are the potential victims of tobacco-related illnesses and will be the burden of public health system in the coming years.

Shouldn’t P-Noy care?

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.