Restructuring of 'sin' tax fails to boost collection - think tank

MANILA, Philippines - The restructuring of excise tax on alcohol and tobacco products through Republic Act 9334 actually reversed collection trend, contrary to claims that the law enhanced the responsiveness of the tax system to the economy, a state-run think-tank said.

In a paper on excise taxes and other tax measures, the Congressional Planning and Budget Department (CPBD) said that the law, which President Arroyo signed in 2004, caused excise tax effort for both alcohol and tobacco products to deteriorate four years since the law took effect in 2005.

“Despite periodic updating of specific tax rates in 2007 and 2009, excise tax effort — or excise tax collection as a percentage of gross domestic product (GDP) deteriorated from 0.3 percent in 2000 for alcohol and 0.5 percent for tobacco products to two percent and three percent, respectively in 2008,” said the CPBD in a report submitted to the Department of Finance (DOF).

The CPBD attributed the dismal performance in sin tax collections to the legislated price protection provided by the law.

“Prices of alcoholic beverages and tobacco products pegged at 1996 levels are stipulated in the Tax Code. This is inequitable as new brands are levied with higher tax burden as opposed to historical price for old brands,” CPBD said.

Aside from this, the think-tank said the law also stunted the growth of the tax base as legislated prices prevent product movement from low-priced to medium-priced classification thus, taking away a significant portion of the government’s tax collection.

The current multi-tiered tax system on sin products, CPBD also said, gives taxpayers the opportunity to cheat on the number of quantities produced and classification of products manufactured into premium, high-priced, medium or low-priced brands.

Despite these issues, industry players continue to ask Congress to defer proposed revisions to the sin tax law until after 2011 when the last mandated tax increase under RA 9334 takes effect.

Japan Tobacco International Philippines, Inc. (JTI) and Philip Morris Philippines Manufacturing Inc. have said the government should evaluate the proposed restructuring of excise tax on sin products particularly cigarettes.

The DOF has been pushing for a two-tier excise tax structure in 2012 and 2013 until it is harmonized to a single rate in 2014. This would replace the existing four-tier system that resulted in a 640 percent tax differential between low-priced and premium-priced brands.