From: Malaya Business Insight
‘When smuggling gets rampant, the government does not collect the revenues it expects. This is the level playing field that BAT and the secretary of finance want to foist on the poor smokers.’
THE records of the Bureau of Internal Revenue show that the premium category of cigarettes contributes negligible amounts to excise tax collections. Yet the new tax system approved by the House of Representatives and now pending in the Senate appears to be patently in favor of premium brands to be imported by British American Tobacco (BAT).
In fact, BAT has quietly introduced its Lucky Strike brand using the 7-Eleven chain. The brand is of high quality but now retailed at an incredibly low price of P29 per pack but is taxed under the present law at the rate of P28.30 per pack, leaving BAT an incredibly low margin of only 70 centavos to the pack.
The margin is small. Premium contributes very little to total excise tax collections because the demand is dominated by low end brands or brands which account for an estimated 60 percent of the market.
The present tax rate of brands that sell for P11.50 per pack or lower is P2.72 to the pack.
The level playing field that BAT and Finance Secretary Cesar Purisima want is to raise the tax on low category to P12 for the first year and further up to P22 in the second year. The effective increase in the first two years is more than 700 percent.
On the other hand, the premium brand like Lucky Strike is not imposed a tax in the first year and will be imposed a nominal increase of 6 percent from the present P28.30.
Under the new system, the tax on brands that have a net retail price of P11.50 per pack or lower, is to be imposed an additional excise burden of P12 in the first year, consequently raising the price to P23 per pack. By the second year, the rate is to be increased to P22. As a result, the price will go up to P32 per back which is much higher than the premium brand price of P29 for imported Lucky Strike.
We have not seen the worst yet. Low end cigarettes with a net retail price of P11.50 or higher per pack will have a burden of P28.30 in the first year. This is the rate now paid by premium brands.
By the second year, the burden will be increased to P30 to the pack, raising the NRP to P41. This price is much higher than Lucky Strike selling at present at P29. Why would poor smokers now paying less than P15 per pack buy low category brands if the proposed tax raises the price to P39.80 and P41?
Theoretically, they will buy the better quality imported and cheaper premium brand that sells for P29. They will save between P11.80 and P12 per pack.
The problem here is the poor smokers do not make enough money to buy the premium brand at prices lower than the cheapest brand. In all probability, the poor smokers will shift to smuggled cigarettes which sell for as low as P4.50 per pack.
When smuggling gets rampant, the government does not collect the revenues it expects.
This is the level playing field that BAT and the secretary of finance want to foist on the poor smokers.
It seems abundantly clear that BAT and the DoF want to promote the premium brands by not imposing a tax that will in turn enable BAT to undersell all categories of Philippine-made cigarettes from high to middle to low classifications.
How will the senators or the Senate ways and means committee face the smoking voters who will pay an additional tax of 274 percent in the first year and P700 percent in the second year while the imported premium brands of British American Tobacco are burden free in the first year and imposed an incredibly low incremental rate of 6 percent in the second year? In the name of leveling the playing field? I would not suspect the lawmakers will share the idea with BAT and the Department of Finance.
The House ways and means committee mangled the provisions of HB 5727 such that the proponents lumped premium which pays a tax of P28.30 with high category whose present burden of P12 per back will be raised to the P28.30 burden of the premium brand?
Also lumped with BAT’s premium category is the middle classification which now pays a burden of P7.56 but will similarly be raised to the premium level of P28.30.
In plain simple words, BAT and the DoF are patently discriminating against Philippine made cigarettes in favor of a new importer like British American Tobacco.
The Mild Seven brand made in Malaysia by J.T. International Tobacco SDN BHD and imported by J.T. International Philippines retails for around P60 per pack.
The brand is also in the premium category but the net retail price is twice as high as Lucky Strike. Its small market can also be eaten away by BAT.
And they call it leveling the playing field as a way of attracting more investments. It is not even clear whether or not BAT will make good its proposal to set up a cigarette manufacturing plant at a cost of $200 million.
The company earlier declared in a paid advertisement that it will create additional demand for Philippine leaf by buying three million kilos.
If BAT sets up a manufacturing plant, it might find itself in the same sorry state as the Philippine cigarette makers. So why bother?
J.T. International is eerily quiet about the plan because it will benefit from the proposed excise tax as BAT.
If the Senate agrees with the House version of the new excise tax plan, it will be cursed by us smokers who pay a tax for not kicking the habit but will not carry the burden as we shit to smuggled or illicit cigarettes that are not taxed.
In the end, the authors of the bill may find themselves with very little volume of cigarettes to tax but smuggling will flourish. That’s what BAT and the Department of Finance know only too well but refuse to acknowledge.